Dataproducts Revamps as Ink Turns Red : Woodland Hills Firm Looks to Resume Growth Under New Leader
About the last thing Dataproducts expected to be producing this year was red ink.
Two years ago, the Woodland Hills-based computer-printer manufacturer was growing fast, riding the nationwide boom in computer sales. During its 1984 fiscal year, the company’s net income soared 89% to more than $26 million.
Its profits, however, were erased this spring as the company fell victim to an industry slowdown. Dataproducts reported its first quarterly loss in 14 years--$19.4 million for the first quarter ended June 29. About the same time, the company slashed its worldwide work force from a high of 5,700 employees in February to 4,000 and closed plants in San Jose and Irvine.
Among the casualties was Charles A. Dickinson, the company’s president and chief executive, who resigned April 18 after disagreements with Chairman Graham Tyson and other directors over how the company should be organized.
Dataproducts is retrenching now under Tyson, Dickinson’s replacement as chief executive. Tyson, who helped found the company in 1962, says that the leaner Dataproducts will be profitable again later this year and is poised to grow once the computer-industry slump ends.
Although analysts approve of the restructuring, some feel this isn’t a time for Dataproducts to be optimistic. They argue that the prospects for computer-related companies are too uncertain, particularly because of tenacious competition from Japanese manufacturers.
“The situation continues to be a bleak one. Because of that, the earnings of this company past, present and near-term future are very uninspiring,” said Peter Anastos, an analyst covering Dataproducts for Alliance Capital Management, the company’s largest shareholder with 13% of the stock.
Many of Dataproducts’ problems can be traced to the slowdown in computer sales that has pummeled the entire industry. In retrospect, however, company executives also blame themselves.
They say that they misjudged the depth of the computer-industry recession, probably should not have tried to compete with Japanese makers of low-cost printers for personal computers and did not react fast enough last year when the first signs of an industry slowdown appeared.
Those mistakes are responsible for the extensive self-analysis Dataproducts is now conducting as it tries to develop a new strategy. The word “vision” comes up frequently when company executives and directors explain what they want. In short, they say that they want a plan and a person to sort out where Dataproducts will fit into the computer-products business whenever the industry slowdown ends.
Some analysts wonder whether Dataproducts may be ripe for a takeover. The company holds more than $100 million in cash in short-term investments, 10.5 acres of prime commercial real estate in San Fernando Valley’s Warner Center and less than $12 million in debt, which, with the exception of a few mortgages, is expected to be paid off by the end of the year.
Attractive to Buyers
Low debt and valuable assets, especially cash, make a company attractive to friendly or hostile buyers. Some analysts speculate that the company, by paying off its debt and hoarding its cash, may be dressing itself up for a potential buyer such as a large computer maker.
Tyson denies this. “It is this company’s desire to be independent,” he said. “We feel we have better growth opportunities, in terms of percentage growth, than we would have if we were part of a large company.”
Analysts say the company might be vulnerable to a hostile takeover, in part because only 3.4% of Dataproducts’ stock is owned by its directors and officers.
Tyson acknowledged that the current rash of takeovers concerns him, but said he is not looking over his shoulder for corporate raiders. “We’ve had enough problems in the company and have enough opportunities that we spend most of our time trying to build the company. If we do that, then the price will go back up for the stock and the problem will be over,” he said.
Dataproducts’ losses will continue for at least one more quarter. The company says that it will report another deficit in its current quarter ending Monday. Analysts estimate the operating losses could run as high as $3 million.
Once this quarter ends, Dataproducts believes its cutbacks will make the company profitable again and, if the current computer recession ends, allow it to resume annual sales growth of 25% to 30% and annual profit growth of 8% to 10%.
In its 1985 fiscal year ended March 30, Dataproducts’ profits increased 6% to $27.7 million, with revenue up 18% to $471.8 million.
The previous year, profits soared 89%, while revenue rose 25%.
Some of the strategies Dataproducts expects to use to restore its financial health already have been developed. Dataproducts executives want to expand their government business from 10% of the company’s revenue now to as much as 25% because they feel it will provide stability.
More emphasis will be put on two areas of businesses that the company has largely ignored, the fixing and upgrading of old printers and the supplying of products such as ribbons that are used in printers. Another potential market is so-called “value-added resellers,” who buy computer equipment from suppliers and package the products for such users as law firms, accountants and doctors.
The technology Dataproducts is emphasizing in research and development is changing. There is less concentration on so-called “impact printing,” where a piece of metal strikes the paper, much as in a typewriter, although products using the technology account for about 90% of the company’s current sales. The new goal is to develop quiet, non-impact printing technology used in laser printers and printers that spray the ink directly on paper.
A new chief executive likely will be the one in charge of carrying out or refining these strategies. Tyson, 62, makes it clear he wants to turn the job over to someone else soon. The company is looking for an executive search firm now, and expects to find a new chief executive by the end of the year.
Tyson and other board members reveal few details about the kind of executive they want. “We need a person with a vision of this industry whom we can ask: ‘What is your best guess as to where this is going,’ ” said director Jack D. Steele, dean of the University of Southern California School of Business Administration.
Tyson said the new executive must have some marketing experience and be able to articulate the company’s goals, something he describes as one of his faults. A stronger, beefed-up marketing department, he said, might have alerted Dataproducts sooner that the slowdown in sales last year was a long-term trend instead of a temporary condition.
Misled on Depth of Slump
“We saw our orders starting to slacken from major computer manufacturers a year ago. We were led to believe by our marketing people and major computer manufacturers that this was just a short-term correction,” Tyson said.
Dataproducts, like many other computer companies, needs a conservative chief executive who can manage the company through periods of slow growth in revenue, maintaining the business profitably at growth rates of about 12%, said computer analyst Thomas Rooney of Donaldson, Lufkin & Jenrette in New York.
Part of the disagreement between Tyson and Dickinson stemmed from Dickinson’s favoring of a company with autonomous clusters. Under Dickinson, there were 10 such divisions, twice as many as there are now.
Each line of printers made by Dataproducts, for example, had a division that included its own product development, manufacturing and research groups. In Woodland Hills, there was a division for medium-speed printers and a separate one for high-speed printers.
Clash Over Organization
Dickinson said that setup helped the company monitor profits and losses. Tyson, however, said that he felt the autonomous divisions kept the company from developing the kind of breakthrough products it needs to stay competitive.
“They each did their own development, which tended to be evolutionary development based on products they already had,” he said.
Analysts criticize Dickinson for plunging the company into the low-end printer business, the market for slow-speed printers for personal computers typically priced at less than $2,000.
“Charlie came in, took over the reins and, before you know it, was expanding it. The mentality was that they had to expand and get into all kinds of different markets to diversify. It’s now blowing up on them,” Anastos said.
The problem is that Japanese manufacturers can produce the same printers more cheaply. Dickinson said the decision was made before the Japanese flooded the U.S. market with their own low-end printers.
Haunted by Situation
The decision still haunts Dataproducts because many of those printers are sitting unsold in its warehouses. The company is considering taking a loss for this quarter to recognize the declining value of that inventory, which analysts estimate would be in the $3-million range--and would be in addition to the operating losses.
Director George W. Brown, a retired management professor at the University of California, Irvine, believes that there was little Dataproducts could do last year to prevent being hurt by the computer-industry recession. Last year’s drop in orders was at first viewed as typical for a volatile industry.
“All kinds of people can assert we should have seen it coming. I don’t know how we could have,” Brown said. “At what point do you alter your product plans? At what point do you decide that a certain product you are working on shouldn’t be brought out?”