| New York Times: October 29, 1991 "Light at the End of Digital's Tunnel"
Glen Rifkin
For the Digital Equipment Corporation, the $14 billion computer
giant, the last two years have been the worst of times.
The country's second largest computer maker has experienced
plummeting earnings, stagnant revenues, a staggering decline in
hardware sales, huge layoffs for the first time in its history and
dismal morale. A recent reorganization has driven off top executives,
while Digital stock has languished below book value.
So why are so many analysts and consultants suddenly saying such nice
things about the company?
Part of the answer lies in last week's announcement of powerful
aggressively priced VAX 4000 and VAX 6000 computers up to three
times as fast as current models. Analysts expect the new offerings
to set off a resurgence in sales of Digital's key low to mid-range
lines.
"There's a pent-up demand for these systems", said Terry Shannon, a
consultant with Gander Associates, in Ashland, Mass., and a longtime
Digital watcher. "This could be the beginning of a major turnaround
for Digital."
These computers will serve as a bridge to Digital's next generation
of machines - code-named Alpha - which will incorporate the popular
RISC technology in last 1992.
"The are closer to the end of the tunnel than people give them credit
for," said John Adams, an analyst with Adams, Harkness & Hill in
Boston. RISC, or reduced instruction set computing, is a simplified
design approach that significantly speed computer performance.
The company has bounced back before, some analysts point out. "Back
in 1983, Digital was under-performing the industry, and a lot of
investors thought the ballgame was over for them," said Marc
Schulman, an analyst with UBS Securities. "The investors were
proven wrong then, and they will be again."
Overdue staff cuts are finally helping to get costs under control,
many who follow the company say Digital has taken $1.65 billion in
reorganization charges since last year and cut 11,300 employees from
a payroll of 126,000 since late 1989, with plans for the cutbacks to
continue.
In the view of several analysts, Kenneth H. Olsen, the company's
enigmatic founder, and for 34 years, its only president, only belatedly
accepted the need for retrenchment. Mr. Olsen, 64 years old, has
turned over day-to-day operations over to John F. Smith, the senior
vice president for operations.
"He's never had to lay off people like he's doing now," John B. Jones
of Montgomery Securities in San Francisco, said of Mr. Olsen. "He's
tired of it, and there's a lot more ahead."
Although analysts including Mr. Jones have urged Mr. Olsen to step
down, those who have followed his career doubt that he will before he
has restored the company to health. "Ken is going to leave when he
wants to," Mr. Smith said, "He maintains he is going to live forever."
Analysts More Upbeat
Even with Mr. Olsen staying on, the analysts have become more upbeat.
Quarterly earnings, announced in mid-October, were only 23 cents a
share, compared with 21 cents a share for the comparable quarter last
year, but analysts praised the company's progress in a dismal
economy.
Mr. Jones himself has upgraded the stock - which closed yesterday at
$61 a share, down 37.5 cents - to an aggressive "buy". "They are
realizing the error of their ways" and recognizing the need for their
prices to be more competitive with those of IBM, Hewlett-Packard and
Sun Microsystems, Mr. Jones said.
With enough cash on hand - more than $2 billion - to start a substantial
bank, and little debt, the company sports one of the strongest balance
sheets in the industry. Mr Jones expects its share price to jump to
$100 in the next 12 to 15 months.
Digital's resurgence is not yet an accomplished fact. Some critics
content that Digital has yet to prove its commitment to moving away
form the proprietary hardware and software that fueled the company's
tremendous growth during the late 1970's and 1980's.
"They are saying all the right words but doing the wrong things,"
said George Colony, a consultant with Forrester Research in Cambridge,
Mass. "at the end of the day, this company still sells mini-computer
systems, which will give you a 3 percent growth a year, and won't
sustain 115,000 employees."
Mr. Colony said Digital needed to pare its payroll to fewer than
90,000. "They are getting something like $100,000 in revenues per
employee, while companies like Compaq and Apple are around $300,000,"
Mr. Colony said. "They have to get that to at least $175,000."
David Wu, an analyst with S.G. Warburg & Company, added "Digital will
have a turnaround, but it won't last for more than six months."
Senior Executives Depart
Layoffs and a companywide reorganization have stripped many senior
executives of their power, contributing to the departure of five vice
presidents in the last 12 months, including James Osterhoff, Digital's
highly regarded chief financial officer. Digital watchers expect more
senior people to leave.
Mr. Smith, the senior vice president of operations, said the company
has learned some valuable lessons from letting costs go wildly out of
control during the late 1980's. "We're never going to let that happen
again," he said. "Even if we started booming tomorrow, we wouldn't
start hiring again."
The layoffs, have inflicted wounds that have changed the corporate
culture forever. Gone is the expectation of employment for life that,
though never official policy, was a tenet of the family-like
environment that Mr. Olsen so carefully preserved.
Family Feeling is Gone
"The family feeling is gone, and a lot of people are angry that it's
gone," said one employee, who requested anonymity. "There's also a
feeling that even though a lot of the dead wood has been cut, there's
still a lot more here."
Employees also perceive continuing disarray at the company's highest
levels. Mr. Smith acknowledged that Digital's managers have done a
poor job of sharing their vision with employees. "I hear about the
confusion at the top," he said. "I know that people want to know what
business we are going to be in in 5 to 10 years. We haven't
communicated that as well as we should."
Rumors fly over the company's electronic networks about the future
of Mr. Olsen. Mr. Olsen has never anointed a successor and has
cautioned journalists not to read too much into Mr. Smith's expanded
role.
But a company spokesman, Dallas Kirk, saying the Mr. Olsen's schedule
would not allow a prompt interview, added that it was time to push Mr.
Smith "out front" some more.
A Common Predicament
Digital's predicament is common to several other major computer
makers. A company that grew up as a maker of computer hardware has to
survive in maturity as a provider of software and services. These two
categories already account for more than half the company's revenues,
playing off its unparalleled strength in assembling computer
networks.
Digital readily ties hardware and software from other makers into its
own equipment and services products from other companies as well.
Digital's hardware sales , meanwhile, have fallen as improved
performance at lower prices squeeze margins ever tighter.
"Pricing is horrendous for everyone in the industry," said Stephen
Smith, an analyst with Paine Webber. Prices have dropped sharply in
the last few years, he continued, adding, "Digital has to sell twice
as many units in one year to generate the same revenue."
Losses in Hardware
Digital has loss more than $200 million on hardware sales in 1990 and
is likely to lose nearly $500 million more in 1991, Mr. Adams, the
analyst said. At the same time, Digital's service sector is growing
strikingly, from $450 million in profits in 1990 to an estimated
$900 million in fiscal 1992.
Changing Digital's focus from hardware to software is not easy.
Within a year, several popular Digital offerings, including its
All-in-One [sic] office software, will be available for IBM, Hewlett
Packard, and Sun computers, Mr. Shannon, the consultant said.
Hardware still brings in nearly $6 billion in annual revenues and
allows the company to sell the necessary software and services.
Pushing into Personal Computers
Digital is quietly pushing into personal computers, a market where it
has floundered several times. Mr. Schulman estimated that Digital's
customers would spend $10 billion on personal computers this year,
and Digital is intent on expanding its current 4 percent market
share.
Abandoning past efforts to design and build its own personal
computers, Digital is now reselling machines from the Tandy
Corporation and Intel Corporation. Mr. Ryan said the company could
turn an excellent profit by building networks around the personal
computers.
The company expects its personal computer network business to grow to
more than $2 billion by the end of its fiscal year next June.
Alliance with Microsoft
Digital is also taking advantage of the breakdown in IBM's
relationship with Microsoft to forge its own alliance with the most
powerful maker of personal computer software.
Mr. Schulman predicts a deal between Microsoft and Digital based on
Microsoft's next generation of the popular Windows software and
Digital's Alpha computers. David Cutler who is designing Windows NT,
helped create some important Digital software in the 1970's.
Whether all the changes at Digital will add up to a turnaround
remains to be seen. But as Mr. Schulman, the analyst, said "This is
a company that has come back from adversity before."
[transcription: Patrick Sweeney, Clay Yost]
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