Digital beats estimates--barely

The systems company continues to lean on sales of Microsoft Windows NT-based PCs and server systems for growth.

3 min read
Digital Equipment (DEC) beat Wall Street estimates today for its fiscal fourth quarter, buoyed by strong sales of systems running Microsoft Windows NT.

The Maynard, Massachusetts-based company announced earnings of $124 million, or 75 cents per share, for the quarter, beating consensus analyst estimates compiled by First Call by 2 cents. A year earlier, the company posted a profit of 33 cents a share before a restructuring charge of $492 million to pay for job cuts and plant closings.

The announcement ended Digital's fiscal year, with the company reporting $141 million in income, or 68 cents per share. Revenue for the year came in at $13 billion, compared with $14.6 billion for fiscal 1996.

Revenue for the quarter was $3.5 billion, compared with $3.7 billion for the same period a year ago. Of that, $2 billion came from product-related sales and $1.5 billion came from the services side of the business.

The company's board of directors authorized the repurchase of 15 million shares of Digital's common stock in conjunction with the positive earnings announcement.

Digital reported higher profits in its personal computer business for the third straight quarter. "The progress in our personal computer business over the past year has been excellent," noted Digital CEO Robert Palmer in a statement. "We defined and implemented a strategic focus on Windows NT commercial client-server solutions."

"More than ever before, Digital now has a strategy and a structure which strongly support what it can do best: provide complete solutions," Palmer continued.

Prior to the earnings announcement analysts were confident Digital would show growth for the quarter. "It will be respectable," Jay Stevens, an analyst with Buckingham Research Group, said of Digital's fourth-quarter results. "People might latch onto that to say there's improvement at DEC."

Palmer said at the end of the third quarter in April that he was disappointed with a year-over-year decline in revenues. He said it might take a few quarters to turn the situation around.

Steve Smith, an analyst with Paine Webber, said of the fourth-quarter results: "We're looking for a 4 percent revenue decline."

Digital had revenues of $3.72 billion in the fourth quarter last year.

Digital sales of computer systems based on its Alpha microprocessors have cooled in recent quarters, Smith said.

"We continue to expect a decline year-on-year with the Alpha business. I think Wall Street is really going to key off Alpha in the future," he said.

On the other hand, sales of workstations and high-end servers may be higher, said Terry Shannon, editor of the newsletter Shannon Knows DEC.

During the fourth quarter, Digital made headlines with its lawsuit against Intel. Digital alleged that the chipmaker illegally used Digital technology to build the Pentium microprocessor family.

Also during the quarter, a New York broker-dealer held a meeting of institutional shareholders and criticized Digital's lackluster stock price and its marketing and advertising efforts.

Analysts said the lawsuit and the institutional shareholder meeting would have little impact on fourth-quarter earnings.

"A customer will just look at a product and decide whether it makes sense for them or not," Stevens said. "The Intel lawsuit--that's background kind of stuff. It's not something that I would use as part of the decision process."

Reuters contributed to this report.