Conference rocks::uk_digital

1423.0. "Q3 FY97 results" by DRAM::SYSTEM () Fri Apr 18 1997 10:09

               DIGITAL reports Q3 net income of $51 million
      
         DIGITAL today reported net income of $51 million, or 27 cents per 
   common share, for the third quarter which ended March 29, 1997, 
   compared with net income of $124 million, or 74 cents per common share, 
   for the same period last year.
         Total operating revenue for the quarter was $3.31 billion, 
   compared to $3.62 billion reported for the comparable quarter a year 
   ago.
         "I am pleased we showed good earnings improvement over our second 
   quarter," said DIGITAL Chairman Robert B. Palmer. "Although revenue was 
   not where we wanted it to be, it was within our expectations with 
   progress in key strategic areas.  I am particularly encouraged by the 
   growth in Windows NT-based solutions and Internet products and 
   services. I am confident that we will return to year-over-year revenue 
   growth over the next few quarters."
                                                                          
   Progress made in strategic areas
 
         Product revenue in the quarter was $1.84 billion compared to 
   $2.06 billion in the third quarter of the previous year.  Service 
   revenue was $1.48 billion compared with $1.57 billion reported in the 
   same period last year.
         Palmer said DIGITAL is making progress in a number of strategic 
   areas.
         "Our Internet business, which includes servers, networking 
   products, software and services, achieved good growth during the 
   quarter with total revenue now more than $1 billion on an annual 
   basis," Palmer said. "We are achieving substantial success in sales to 
   Internet service providers where more than 200 ISPs in 37 countries 
   have turned to DIGITAL for Alpha and Intel servers, storage systems and 
   networking products."
         Palmer said the company also is winning business with Microsoft 
   Exchange on Windows NT, capturing approximately 900,000 Exchange seats 
   worldwide since the beginning of the fiscal year.  More than 50 percent 
   of the wins represent new business for DIGITAL, including installations 
   at British Petroleum and Lehman Brothers.
         DIGITAL's network product business, Palmer said, introduced a new 
   family of high-performance switches that was well-received by the 
   marketplace and generated strong demand.
         The company's Services Division, Palmer said, met both its 
   near-term objectives for revenue and gross margin.  The division 
   announced a $70 million services contract with Canada's TransAlta 
   Corp. early in the quarter and recently won a $13.5 million contract 
   with Perkin Elmer, a leading manufacturer of life-science systems and 
   analytical instruments, to help design, manage and support a worldwide 
   SAP infrastructure.
         
   New products rolled out in Q3
 
         During the quarter, DIGITAL introduced a number of important new 
   products. 
         The company announced additions and enhancements to its 64-bit 
   DIGITAL AlphaServer and personal workstation product lines. The new 
   AlphaServer 800 and enhanced AlphaServer 1000A systems provide 
   high-availability, computer-clustering solutions for UNIX and Windows 
   NT and new Windows NT intranet search capabilities. The competitively 
   priced entry-level servers target the small business market.
         Two new Windows NT personal workstations were announced based on 
   the Alpha microprocessor which deliver breakthrough Windows NT 
   workstation performance and the world's fastest Windows NT 3D graphics 
   solutions.                                                             
         Additionally, the company unveiled three new models in its 
   value-priced HiNote VP 500 mobile client series which include models 
   with Windows NT Workstation 4.0 pre-loaded and pre-configured with 
   power management and plug-and-play features.
         DIGITAL continued to strengthen Alpha's position as the 
   industry's leading high performance microprocessor. The company 
   unveiled the low cost Alpha 21164PC microprocessor, jointly designed 
   with Mitsubishi Electric, that delivers Alpha power at PC prices making 
   it very attractive to the volume Windows NT market.
         In addition, DIGITAL announced a network appliance reference 
   design with Network Computer Inc., a subsidiary of Oracle Corp., based 
   on DIGITAL's low power/high performance StrongARM microprocessor.  The 
   reference design is aimed at creating the industry standard for the 
   most powerful, low-cost network computing platform.
         Early interest in this offering is very encouraging, with Funai 
   Electric Company and Aranex Inc. already committed to producing network 
   computing devices based on the design. 
         Additionally, DIGITAL announced a memo of understanding with 
   China Aerospace Corporation for a joint venture in the People's 
   Republic of China to explore development, manufacture and distribution 
   of network computers based on this reference design.
 
   Expense control
   
         Gross margin for the quarter was 33.4 percent, compared with 32.9 
   percent in the previous quarter and 34.6 percent for the comparable 
   period a year ago.
         Product gross margin was 35.3 percent, compared with 37.1 percent 
   in the third quarter of 1996. Service gross margin was 31 percent 
   compared with 31.3 percent in the third quarter of fiscal 1996.
         "Over the past three years we've succeeded in improving product 
   gross margin by 10 points while at the same time, stabilizing service 
   gross margin," said DIGITAL Chief Financial Officer Vincent J. 
   Mullarkey.
         Total operating expenses were $1.06 billion compared to $1.13 
   billion reported in the same period last year.
         "Overall operating expenses for the quarter reflected good 
   management control and the impact of restructuring, resulting in a 7 
   percent reduction in operating expenses from the same period last 
   year," Mullarkey said.
         "Our third quarter profits improved considerably over the second 
   quarter, despite the significant negative impact of the strengthening 
   U.S. dollar," Mullarkey continued. "Management actions were taken 
   across the company during the quarter to partly mitigate the currency 
   impact."
         The company ended the quarter with $2.48 billion in cash and 
   short term investments, up approximately $200 million from the second 
   quarter. 
         "The company's balance sheet continues to strengthen in all 
   areas," Mullarkey said.  "Improvements in inventory and accounts 
   receivable contributed to the fifth consecutive quarter of positive 
   cash flow from operations. During the quarter, the company repurchased 
   4.5 million shares of common stock at a cost of approximately $160 
   million. The company's cash and short term investments position has 
   improved more than $700 million from a year ago."
         The corporation completed the quarter with approximately 55,100 
   employees -- a net reduction of 5,800 positions from a year ago.
         Statements contained in this press release which are not historic 
   facts are forward-looking statements as that term is defined in the 
   Private Securities Litigation Reform Act of 1995. All forward-looking 
   statements are subject to risks and uncertainties which could cause 
   actual results to differ from those projected. Such risks and 
   uncertainties are discussed more fully in the company's latest 
   quarterly report on Form 10-Q and the company's other filings with the 
   Securities and Exchange Commission.
   
   Consolidated Statements of Operations (Unaudited)
   (in thousands except per share data)
                         
                                          Three-month Period Ended               
                                  March 29, 1997         March 30, 1996 
 
 Product sales...................$     1,836,516         $    2,055,710 
 Service revenues.................     1,477,794              1,565,316 
 Total operating revenues.........     3,314,310              3,621,026 
 Cost of product sales............     1,188,578              1,294,032 
 Service expense..................     1,019,290              1,074,650 
 Research and engineering 
  expenses........................       256,476                275,703 
 Selling, general and 
  administrative expenses.........       798,714                858,203 
 Operating income.................        51,252                118,438 
 Other (income)/expense, net (1)..       (10,848)               (19,272)
 Income before income taxes.......        62,100                137,710 
 Provision for income taxes.......        11,134                 13,637 
 Net income.......................        50,966                124,073 
 Dividend on preferred stock......         8,875                  8,875 
 Net income applicable 
  to common stock................$        42,091         $      115,198 
 Net income applicable 
  per common share (2)...........$          0.27         $         0.74 
 Weighted average common 
  shares outstanding..............       155,666                156,594 
                         
                                          Nine-Month Period Ended                
                                  March 29, 1997         March 30, 1996 

 Product sales...................$     5,202,959         $    6,221,248 
 Service revenues.................     4,380,739              4,622,275 
 Total operating revenues.........     9,583,698             10,843,523 
 Cost of product sales............     3,445,203              4,133,992 
 Service expense..................     3,016,261              3,115,310 
 Research and engineering expenses       763,961                795,483 
 Selling, general and 
  administrative expenses.........     2,348,297              2,464,372 
 Operating income.................         9,976                334,366 
 Other (income)/expense, net (1)..       (27,465)               (30,416)
 Income before income taxes.......        37,441                364,782 
 Provision for income taxes.......        20,475                 43,756 
 Net income.......................        16,966                321,026 
 Dividends on preferred stock.....        26,625                 26,625 
 Net income/(loss) applicable
  to common stock................$        (9,659)        $      294,401 
 Net income/(loss) applicable 
  per common share (2)...........$         (0.06)        $         1.91 
 Weighted average common 
  shares outstanding..............       154,965                154,209 
                         
   Note (1):  In the third quarter of fiscal 1997, Other (income)/expense, 
   net includes approximately $30 million of interest income, $21 million 
   in interest expense and $2 million in net gain on divestments. In the 
   third quarter of fiscal 1996, Other (income)/expense, net includes 
   approximately $19 million in interest income, $26 million in interest 
   expense and there were $26 million in net gains on divestments. In the 
   first nine months of fiscal 1997, Other (income)/expense, net includes 
   approximately $82 million in interest income, $64 million in interest 
   expense and $9 million in net gains on divestments.  In the first nine 
   months of fiscal 1996 Other (income)/expense, net includes 
   approximately $57 million in interest income and $75 million in 
   interest expense and $48 million in net gains on divestments.          
                 
   Note (2):  Per common share amounts are calculated based on the 
   weighted average number of common shares and common share equivalents 
   outstanding during periods of net income, after deducting applicable 
   preferred stock dividends. Per share amounts are calculated based only 
   on the weighted average number of shares outstanding during periods of 
   net loss, after deducting applicable preferred stock dividends.
         
   Selected Balance Sheet Data (Unaudited) - Q3 FY97
   (in thousands except per share and employee data)
                 
                                                         March 29, 1997          
 
 Cash, cash equivalents and short-term investments.......$    2,481,708          
 Accounts receivable, net of allowances...................    2,886,164 
 Inventories..............................................    1,471,390 
 Prepaid expenses, deferred income taxes and other 
  current assets..........................................      324,510 
 Total current assets.....................................    7,163,772 
 Property, plant and equipment, net.......................    2,114,074 
 Other assets.............................................      334,667 
 Total assets.............................................    9,612,513 
 Bank loans and current portion of long-term debt (3).....      264,043 
 Accounts payable.........................................      810,056 
 Accrued restructuring costs..............................      443,230 
 Total current liabilities................................    4,187,413 
 Long-term debt (3).......................................      749,320 
 Postretirement and other postemployment benefits.........    1,179,420 
 Total liabilities........................................    6,116,153 
 Stockholders' equity....................................$    3,496,360 
 Book value per common share.............................$        20.26 
 Non-U.S. revenues...................................QTR $    2,274,037 
                                                                    69%
                                                     YTD $    6,473,907 
                                                                    68%
 Employee population (approximately).....................        55,100 
         
   Note (3):  In the second quarter of fiscal 1997, $250 million was 
   reclassed from long-term debt to current portion of long term debt to 
   recognize that the five-year bond is due in November of 1997.