Strategies : Getting on Line : Outlook Brightens for Computer Consoles’ Troubled Irvine Division
While much of the computer industry was enjoying brisk business last fall, Computer Consoles employees in Irvine “had scars on their chins from dragging them around.”
At least that’s the assessment of John (Jake) Jacobson, a senior vice president who heads the Irvine-based computer division of Computer Consoles.
“In many ways, 1987 was a very frustrating year,” said Jacobson, whose division manufactures and markets computers and office automation equipment for businesses, law offices and the federal government.
After the division ran up $27 million in red ink during 1986 and the first half of 1987, Computer Consoles officials decided that it was time for drastic action.
As part of a major restructuring program, the company slashed 90 of the Irvine division’s 400 jobs, consolidated some operations and eliminated several computer product lines.
Now, four months later, company officials and some securities analysts are cautiously upbeat about the prospects for the Waltham, Mass.-based computer and communication products manufacturer.
“We’ve gotten our act together,” declared Jacobson, who predicts that; the 2-year-old computer division will post its first-ever quarterly profit in 1988’s second quarter.
“The prognosis is good,” agreed John W. Adams, a securities analyst who follows the company for Adams, Harkness & Hill, a Boston investment firm.
The company as a whole expects to report record earnings of about $11 million on sales of about $148 million for 1987. Final figures are due out later this month.
The Irvine division recently received a major boost when Unisys signed a three-year contract valued at up to $100 million to purchase Computer Consoles’ Power 6 minicomputers. Several analysts said the purchase by Unisys, a major computer company formed by the merger of Burroughs and Sperry, is a strong endorsement of the Irvine division’s technological know-how.
With business prospects improving, Computer Consoles has resumed hiring and plans to add 50 jobs in Irvine by March.
“We’re now down to a much smaller but much more effective organization,” Jacobson said.
Jacobson is one of several former key Wang Laboratories executives who quit the large office automation company in 1985 to follow former Wang President John Cunningham, who was recruited to orchestrate a financial turnaround at Computer Consoles. Cunningham, an 18-year Wang veteran, became Computer Consoles’ chairman and chief executive.
While Cunningham and his former Wang colleagues brought an unusual amount of big-company experience to Computer Consoles, they also brought business strategies that may have been more appropriate for a Fortune 500 firm like Wang than a small computer company.
Jacobson acknowledges that the Wang group made some mistakes in the Irvine computer division, which accounts for more than half of Computer Consoles’ sales.
One of the mistakes was lavish spending on product research and development. In 1985 and 1986, the firm was spending 20% to 25% of total sales on R&D;, compared to an industry average of about 10%. To justify such spending, the company tried to boost sales by beefing up its marketing staff.
“We tried to buy our way out of the problem,” Jacobson conceded. “We had had a pattern of overspending for the last four years. We just made the decision that if we were going to be a real computer company, we just couldn’t keep doing this.”
90 in Division Fired
Last September, the company slashed $6 million in expenses by firing 90 people in its computer division, mostly in marketing and sales. At the same time, the firm trimmed its product line to concentrate on its most profitable machines.
“We tried to do too many things with too many product lines,” said Jacobson. “We had a product line that was almost as big as Wang’s. Most of the guys came out of a big company and were used to broad product lines.”
Computer Consoles decided to stop manufacturing and marketing its smaller, less expensive business computers and instead focus its resources on its Power 6 line of medium-size business computers that sell for $90,000 and up.
“We’ll be concentrating on the big systems, the larger boxes,” Jacobson said. “That’s where our strength is.”
In another important move last year, Computer Consoles erased more than $60 million in bank debt, mostly by selling a portion of its computer leasing subsidiary to General Electric Credit Corp. for $48 million. “A lot of risk has been taken out of the situation,” said analyst Adams. “It puts Computer Consoles on very solid financial footing and gives them the ability to invest heavily in the Irvine operation.”
The company’s other principal operation is a Rochester, N.Y.-based communications products division, which makes computers to automate telephone company directory assistance and 911 emergency calling operations.
Slow-Growth Prospects
“The Rochester business is very solid, but it’s a very mature business” with relatively slow-growth prospects, said Karen Payne, technology analyst with Butcher & Singer, a Philadelphia investment firm. “The Irvine business has an opportunity to grow 30% to 50% annually. It’s definitely where the company’s future is.”
Computer Consoles is counting heavily on the success of its next-generation computer, code-named Regulus, to fuel its future growth. The company has designed an advanced computer chip that will be the heart of the new machine, which is supposed to be several times more powerful than the company’s fastest existing product.
“Three or four years ago Computer Consoles had a product that probably had the best price-to-performance ratio in the industry,” Payne said. “A lot of companies have now caught up with them.”
For its Regulus machine to be successful, she said, Computer Consoles will need to “leapfrog” the technology of much larger competitors like American Telephone & Telegraph, Data General, Digital Equipment and Wang.
