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MIDRANGEAnalysis of Digital Equipment Corp.'s Second (Fiscal '98) Quarter
DEC: Back in the BlackSolid Revenue Growth in Local Currencies Dampened by Asian Crisis
Digital Equipment Corp. (DEC) is back in the black. It recorded a net income of $75 million for its second quarter (of the fiscal year 1998, which ends June 30), more than double the net profit from a year ago ($32 million). And the stockmarket liked it. DEC's stock was up two points to $391/2 in early trading following the release of its second quarter results.
In a teleconference which followed the earnings' release, DEC's CFO, Vince Mullarkey, said that he was "very encouraged" by the results which reflected a "continuing momentum" in the company's financial improvements.
DEC's revenues were basically flat compared to the quarter a year ago, but would have been up 6% had the foreign currency translations, especially in Asia, not dampened the results in U.S. dollars. In fact, the company recorded solid growth in local currencies in all of its world markets except the Asia/Pacific.
Ironically, it was the Asia/Pacific area that experienced the most robust growth in the fiscal year 1997 which ended June 30, 1997. In the latest period, however, its revenues declined in the double digits, roughly by about the same percentage by which it increased last year. But the revenues in North America were up 7%, while in Europe and Latin America they went up by 9% and 28% respectively (in local currencies).
One reason for the turnaround and surge in revenues in the last six months was a reorganization which DEC underwent last July. "We decided to focus on a small number of high growth markets," said Bruce Claflin, a senior vice president and a former IBM PC executive who now heads up DEC's worldwide sales and marketing.
At the same time, DEC streamlined its sales organization so as to put only one face to a customer. And the moves are starting to pay off. The telecommunications industry segment is up 20%; the Internet providers' business surged by 75%; the mail and messaging revenues are up over 50%, while the technical computing revenues increased by 42%.
DEC has also just landed a blockbuster deal at Reuters which Claflin characterized as a "megawin." While refusing to disclose the specific numbers, this Windows NT-based order is the largest in DEC's history, and possibly the largest NT-based order in the world, Claflin said.
The Reuters business was not included in the second quarter results. But even without that, DEC's overall NT-based systems revenue soared by 94% since a year ago.
The Alpha servers, on the other hand, continue to struggle. After declining by 4% in FY97 (they were up 46% and 76% respectively in FY96 and FY95), the Alpha revenues were up only 2% in the latest quarter on a unit sales growth of 26%. In part, this small increase is due to customers' uncertainty caused by DEC' Alpha patent litigation with Intel Corp. The two companies have subsequently reached a settlement (in October).
DEC's multivendor services revenues increased by 20% over last year's second quarter, while its network services and integration revenues were up in "mid teens," according to Mullarkey. DEC's CFO also said that the company is expanding its systems integration and outsourcing capabilities.
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