DEC's 3Q profit, PC sales to fall short

Electronic News, March 25, 1996

Maynard, Mass.--Digital Equipment Corp. said it expects 3Q96 revenues from PC sales to be lower than expected. Also, earnings are likely to be below the current range of analyst estimates for the quarter, the company said. The computer maker added, however, that results will continue to reflect profit improvement year-over-year.

"Like much of the industry, Digital has been experiencing significantly reduced demand and increased price pressure for PC products, principally in North America," said Bruce Claflin, VP/GM, Digital's PC Business Unit. He said factors contributing to the reduction include "a general slowdown in the commercial PC marketplace" and distribution channels that are overstocked with products from many vendors.

"As a result, there have been greater than anticipated price reductions across the industry and we have reduced prices to remain competitive."

Said VP/CFO Vincent J. Mullarkey: "Obviously, we are disappointed that we will not meet expectations for PC profit margins for the quarter. However, the rest of Digital's business continues to be on track for continued improvement with solid profits expected."

Said analyst Martin Ressenger of Duff & Phelps, Chicago: "The impact on Digital is stronger than I would have expected....People are looking at the earnings being off 20-40 cents per share. And the company reiterated that everything else is going great. They are having repricing weakness and yet they are saying earnings will be somewhere below bottom of Street range."

Mr. Ressenger said the shortfall at Digital is "a one-time hit," with a large part of it to impact this quarter. "The company can compensate over a little bit of time, even if corporate PCs remain weak. With fairly important sales drivers in the corporate PC area to come along in terms of Windows NT and PowerPC, Digital should recover. But will it get back to where it was? Maybe not. If you cut your prices, you don't raise them again. But the impact will be deeper on this quarter than subsequent quarters because of price protection in the channel, which cost them somewhat extra."

Digital's pronouncement last Wednesday, the latest in a string of warnings to expect near-term profit shortfalls (EN, March 18), was followed by a plunge in many high-technology stocks. Digital's shares immediately dove 11- 1/4 to close at 56 the day of the report. Others followed suit. Compaq slid 2 to 38-1/8; IBM fell 4-3/4 to 117; and Hewlett-Packard declined 3-5/8 to close at 97-5/8. Over 11 million shares of Digital and over 5- 1/2 million shares of Compaq traded that day.

Mr. Ressenger called the stock market response an "overreaction. "There clearly is a lot of worry about some of the other companies having to report similar scenarios," he said.