Digital to Cut 7,000 Jobs, Says Profit Will Lag
Digital Equipment Corp., which eked out a profit in 1995 after years of losses, said Tuesday that earnings in the latest quarter will not meet investors’ expectations, and it announced plans to cut 7,000 jobs.
The announcement came the day after the head of the Maynard, Mass.-based company’s personal computer business resigned, sparking a sell-off in Digital’s stock Tuesday.
Digital said it expects profits in its fourth quarter ended June 29 to be significantly below Wall Street estimates, with revenue falling below year-ago levels.
The news sent Digital stock tumbling $5.50 to $40.275 on the New York Stock Exchange, where more than 4.9 million shares traded. Digital stock has fallen 34% in the last 10 weeks amid concern that slowing PC sales and weak revenue in Europe would cut into profit.
It said it will take a $475-million restructuring charge against fourth-quarter earnings to cover costs associated with the job cuts, which amount to about 11% of its work force of 60,900. The cuts and related facility consolidations will occur over the next 12 months.
“The restructuring that we’re announcing today is an integral part of our transformation,” Chief Executive Robert Palmer told reporters in a conference call. “Digital did not get into trouble in a short time and we will not get completely out of trouble in a short time.”
After losing more than $5 billion between 1990 and 1994, Digital posted six consecutive quarterly profits after Palmer engineered a turnaround.
Palmer blamed the latest quarter’s poor results, which will be announced this month, on an unexpected slowdown in Digital’s European business and lagging sales coupled with industrywide price cuts in PCs.
He acknowledged that Digital is doing a poor job of managing its PC business, where revenue dropped 10% in the 12 months ended March 30.
“We’re pretty good at selling, but we’re not so good at forecasting or managing the sales channel,” he said.
Gary Helmig, a SoundView Financial analyst who cut his earnings estimate for Digital last week because of bigger losses in PCs, said the losses have grown to about $90 million in the fourth quarter from $70 million in the third quarter.
“They decided to take their lumps on this PC inventory,” Helmig said, adding that he expects the losses in PCs to be shaved by about half, to about $45 million, in the company’s first quarter.
Digital told analysts that fourth-quarter net income will be less than the 74 cents a share in the third quarter. Revenue in the fourth quarter will be less than the $3.75 billion in the year-ago period.
Wall Street expected earnings of $1.07 a share, based on the average estimate of 17 analysts surveyed by IBES International Inc. A year earlier, the company earned $27.2 million, or $1.01 a share.
Enrico Pesatori, who joined Digital three years ago to head the PC business and rose to become Palmer’s apparent successor, suddenly announced his resignation Monday because of the PC problems.
Palmer denied suggestions by analysts that Pesatori had been pushed out.
“Enrico made a decision based on his own performance,” Palmer said. “It’s clear that Enrico has been responsible for our PC business.”
Palmer will serve as acting head of the computer systems division while Digital decides on a new strategy for its PC business.
Chief Financial Officer Vincent Mullarkey said the company will redouble its efforts in Europe by adding to its sales force and strengthening its relationship with its distribution partners.
Palmer reiterated that many of Digital’s businesses, including its Alpha microprocessor, storage and network products, are growing at double-digit rates.
