Conference 7.286::digital

649.0. "KO says we're doing just fine, thank you.." by DR::BLINN (Eat dessert first -- Life is uncertain) Mon Oct 31 1988 16:28

<><><><><><><><>  T h e   V O G O N   N e w s   S e r v i c e  <><><><><><><><>

 Edition : 1686               Monday 31-Oct-1988            Circulation :  6348 


 DEC - Digital waves off talk on 'What's Wrong?' with firm
	"Computer maker is undaunted by recent results, shifts in industry

   Earnings are dropping. Sales growth has slowed sharply. The stock price has
 plummeted more than 50% in the past year.
   Time for a change? At many companies, yes. At Digital Equipment Corp., no.
   'Digital is doing very well in spite of what you hear,' insists Kenneth H.
 Olson [sic], the folksy founder and chief executive officer and never one to
 worry about what outsiders think. With only minor tinkering, Digital will stay
 the course, he says, producing bread-and-butter midrange computers, in systems
 that connect better in networks than those made by industry giant International
 Business Machines Corp.
   But, will things that worked so well for the last five years succeed in the
 changing computer market? Midrange computers, the company's lifeblood, are
 increasingly viewed as dinosaurs. Digital's 16% sales growth in its latest
 quarter, while far better than that of other midrange computer makers, slowed
 from previous periods because of sluggish demand. New computers from IBM will
 make it harder for Digital to enter companies using IBM. And at the low end,
 powerful personal computers from Apple Computer Inc. and Compaq Computer
 Corp., and engineering workstations from Sun Microsystems Inc., are setting
 off margin-busting price wars.
   William Zachmann, president of Canopus Research, a consulting firm in
 Duxbury, Mass., says, 'The essence of Digital's strategy is to take business
 away from IBM faster than the little vendors take it away from Digital. The
 problem is that over time, there will be less to take away from IBM, and the
 alternatives (to Digital) get more credible.'
   But consultants and analysts are reluctant to criticize Mr. Olsen severely
 because past blasts have proved premature. Digital has acquired a starry
 reputation as a fast-growing large company.

 Going Against Industry Grain
   During the past five years, when most other big companies were either
 restructuring, refinancing or making acquisitions, Digital doubled its sales
 and almost quadrupled profits solely through internal growth. In the year
 ended June 30, net income was $1.31 billion, or $9.90 a share, and sales rose
 to $11.48 billion. While many firms shrank, Digital's work force grew 42% to
 121,500 in five years.
   Digital sharply expanded overall market share, despite its failures in the
 booming personal computer market. Mr. Olsen has been featured on business
 magazine covers, and a new biography dubs him 'The Ultimate Entrepreneur.'
   Mr. Olsen promises more of the same, based on what he sees as continued
 advantages over IBM in having a consistent computer design across the line of
 products and having better ability to make its computers communicate. Analysts
 agree that Digital remains well-positioned. 'As far as new business in the
 midrange, it's all being won by Digital,' says George colony, president of
 Forrester Research Inc., a Cambridge, Mass., company that advises many large
 corporate computer buyers.
   But Digital's stock, which hit a high of $199 last year, has been battered.
 Thursday it closed at $93.50, down 12.5 cents, in New York Stock Exchange
 composite trading. Even after last year's crash, Digital stock kept falling,
 as the company has failed to slow spending in line with the industry-wide
 sales slowdown. And analysts take Mr. Olsen at his word when he pledges
 continued investment in the business. Susie Case, an analyst with First Boston
 Corp., sees 'several more years of aggressive spending,' that will help male
 Digital the only midrange computer maker likely to sharply increase sales, she
 says, but the spending may block significant earnings growth until 1991.
   Although Digital has reined in expenses in recent months, profits are being
 hurt by investments in new facilities to make semiconductors and disk drives.
 And Digital continues to expand its sales and engineering staffs. Mr. Olsen
 concludes, 'Any word on investments now is considered bad news for the
 shareholder.' But he adds, 'We'll live with that. Our investments eventually
 pay off.'

 Midrange Market Slides
   Nevertheless, Digital has to shift its focus beyond midrange computers
 because that market is slowing precipitously. Midrange computers, costing
 $20,000 to $500,000, are used by many companies in branch offices and
 departments, where secretaries and other staff people, working at terminals
 connected to the midrange computer, do word processing, send electronic mail
 and check data.
   Now, many corporate customers are hooking groups of personal computers
 together into local area networks, letting them communicate directly with IBM
 mainframe computers, and bypassing the midrange computers altogether. Marty
 Gruhn, senior vice president of Sierra Group, a Phoenix, Ariz., market
 researcher, says that she asked 50 data processing manager whether such
 networks were cutting into midrange purchases. 'Ninety percent of the guys we
 talk to say, ''absolutely,''' she says.
   Fir future growth, Digital plans to increasingly sell its networking
 expertise and software to create and manage networks of many computers,
 including those made by competitors.
   William Strecker, vice president for product strategy, says that the growing
 needs of customers for big international computer networks gives Digital a
 competitive advantage. 'Hardware has become pretty routine. Software and
 networks and integration will be the only way to add value.'
   But it is at the desktop, the computer industry's biggest growth area, that
 Digital faces its sharpest challenge and is making its sharpest strategic
 changes. After several feckless efforts to make a personal computer that
 customers wanted, it recently announced it would buy personal computers from
 Tandy Corp. and resell them under its own label. It marks the first time that
 Digital, with its legions of engineers and pride in its own designs, will
 resell someone else's computer.
   After a slow start, Digital has rebounded sharply in the engineering
 workstation market by slashing prices on its low-end VAXstations. Domenic
 LaCava, vice president for low-end systems, says it has moved into second
 place and is 'on track to surpass Sun shortly.'
   In another uncharacteristic move, Digital decided to buy a microprocessor
 from Mips Computer Systems Inc., Sunnyvale, Calif., to produce a powerful
 workstation that uses the industry standard Unix operating system. The
 decision meant cancelling Digital's own project to build a microprocessor and
 a departure from its message of compatibility across the whole computer line.
   Indeed, Digital's own product development has been spotty lately.
 'Everything announced this year was a play on a prior platform,' says Jay P.
 Stevens, an analyst with Dean Witter. He predicts Digital won't announce a new
 high-end system, code-named Aquarius, until next summer. 'That's a three-year
 cycle, and the way the industry works today, a product cycle is 1 1/2 years,'
 he says. 'Something got off track.'
   Mr. Olsen says that in the next nine months, Digital will introduce
 computers to replace about 70% of its product line. The key to its strategy is
 lining many different hardware and software products. 'We tie them together.
 That's our place in the world,' he says.
   But the payoff may be difficult to realize. Complex software and networks
 'require a repricing strategy,' says Dale Kutnick, an independent consultant
 in Redding, Conn. 'There's a fantastic opportunity for companies that can
 bring that to market, but it's a mid-1990s thing before it's high revenue and
 profit.'

   [The article is accompanied by a chart titled "Digital's Slowing Earnings
 Growth." Here's translation of the chart to numbers, plus or minus about 5% on
 my interpolations. - TT]

   Percentage change in sales and earnings.

   Fiscal Year/Quarter
	 1987                            1988                            1989
	 1Q      2Q      3Q      4Q      1Q      2Q      3Q      4Q      1Q
Earnings 150%     98      81      58      48      21    -  3       8    -  16
Sales     23%     21      23      22      22      21      18      23       18

   Chart Sources: Corporate reports
	{The Wall Street Journal, 28-Oct-88, p. A6}


<><><><><><><><>   VNS Edition : 1686      Monday 31-Oct-1988   <><><><><><><><>

Could it be that our biggest problem is that we don't think there is a problem?

Dileep

    Re: .0
    
    Ya, I remember how depressed I got when I read that article this
    morning.
    
    Every so often I think about how DEC has rebounded from industry
    problems, and hope that it keeps doing so.  I guess one has to have
    a little faith, huh?
    
    Doug

RE: .0

The most interesting thing about the article to me is that all of the
negative or "cautious" quotes are from different people on different
topics. Is that because the consultants/analysts don't agree on where
or if Digital's problem exists?

I suspect so. Ken's been right too often and for too long. That's my
answer to .1's question.

[Normally I don't have stars in my eyes, but, hey, it's Friday...]

K.