Digital Equipment Posts $183-Million Quarterly Loss
In a fresh demonstration of the problems facing traditional computer companies, Digital Equipment Corp. on Friday shocked investors with a $183-million third-quarter loss.
The abysmal performance sent the company’s stock into a free fall and raised questions about the effectiveness of Chief Executive Robert Palmer, who has generally received good reviews since taking over the top spot at the computer giant two years ago.
Like longtime rival International Business Machines Corp., Digital has been humbled by customers’ rapid movement away from large, expensive, proprietary computer systems toward networks of standardized, low-cost personal computers.
Long the nation’s second-largest computer vendor, Maynard, Mass.-based Digital began piling up losses in 1991, and legendary founder Ken Olsen--unwilling to undertake mass layoffs and other changes demanded by the board--was pushed aside in favor of Palmer.
The new CEO moved aggressively to cut costs, reorganized the company into industry-specific marketing groups and recruited a number of respected outside executives. Results improved steadily, though revenue continued to fall, and Hewlett-Packard Co. took over the No. 2 spot in the computer rankings.
Signs began to emerge early this year that Palmer’s program was running into trouble, and customer-specific marketing organizations were de-emphasized. The third-quarter loss (for the period ended April 2) was more than four times larger than Wall Street expected, and it confirmed the worst fears of analysts.
Digital shares plunged $5.875 to $23 in New York Stock Exchange trading. Computer stocks fell generally; IBM was down 87.5 cents to $53, and Apple Computer lost $1.25 to $30.25.
“The mind-set of senior management--that cost cutting is going to be a solution--has been proven wrong,” said Richard Buchanan, a former Digital employee who is now a senior analyst at Forrester Research in Cambridge, Mass. “The problem is related to corporate strategy. They do not have one.”
Digital’s explanation of the problems reads like a primer on how the computer industry has changed in the 1990s. Revenue from the flagship VAX line of mainframe and mini-computers are in decline. Sales of computers based on the new Alpha design were up, as were sales of industry-standard personal computers.
But those products carry much lower profit margins than the proprietary VAXs. And, alarmingly, Digital’s service revenue plunged 11%; the old-line VAX customer base that relied on Digital maintenance contracts is shrinking, and new customers are seeking cheaper service options.
Overall, Digital’s revenue fell 6% to $3.26 billion from the year-ago quarter, when the company lost $30.1 million.
Service is supposed to be a growth area for companies such as Digital and IBM, which are among the few firms capable of designing, implementing and maintaining large corporate computer systems.
Palmer said Friday that the losses “are unacceptable to this management and obviously disappointing.” He indicated that a new round of layoffs is likely, but he did not provide details. Digital is already in the process of cutting the work force from 92,000 worldwide to 85,000, far below its 1989 peak of about 140,000.
