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Digital benefits from settlement

Digital, in settling its closely watched patent lawsuit with Intel, today walks away with more pocket change for its operations and, potentially, for investors as well.

Digital(DEC), in settling its closely watched patent lawsuit with Intel (INTC), today walks away with more pocket change for its operations and, potentially, for investors as well.

Under its settlement, Intel will pay Digital $700 million for its semiconductor manufacturing operations and will be the company's supplier of both Intel and Digital Alpha microprocessors.

That deal is expected to lower Digital's annual operating expenses by $150 million, said Wendy Abramowitz, an analyst with Argus Research.

"This is a much more efficient business model for us, one that does not require Digital to continue to make substantial and continued investments in semiconductor process development and manufacturing facilities," said Robert Palmer, Digital's chairman and chief executive.

Palmer characterized Digital's new model as being similar to that of Sun Microsystems. But in Digital's case, the company will have Intel as its manufacturing partner.

He added that Intel also will be able to produce "leading-edge" semiconductor chips at a faster rate than what Digital has been able to accomplish, bringing its products to market faster as a result.

"We believe Digital is achieving a significant financial benefit from this agreement," Palmer said.

The agreement extends for ten years, but a question remains of who will manufacture Digital's chip after that time. Despite concern by some analysts, however, Abramowitz said it may not be an issue.

"Will they still need Intel to run their foundry for them ten years from now?," Abramowitz asked. "The question is whether they will still continue to need their Alpha chips by then, since their plans also call for using (Intel's) Merced chip."

Palmer, in his conference call to analysts and the media, said the company stands behind the continued use of its Alpha chip.

Along with the cost savings the company expects to bag, Digital will have an additional $700 million in its pocket.

The proceeds from the same may go toward the company continuing its stock repurchase program, and may shift its recent stance as being a seller of some of its operations to one of being an acquirer.

John Jones, an analyst with Salomon Brothers said the sale of the manufacturing plant made a lot of sense for Digital.

"In the last four quarters, the company has lost at least $100 million from its semiconductor operations," Jones said. "The company built it to get access to...the performance they wanted out of the Alpha chip."

Digital thought that its Alpha chip would be a significant contributor to Window NT, but NT was slow to catch on.

"When they built the plant, they expected Windows NT to be on the desktop several years eariler than it was," Jones said. He added that Digital, with the $700 million it will net from selling its manufacturing operations, likely took home a $1.5 billion package from Intel. The companies, however, declined to discuss details of the settlement.

Digital, in the first quarter ending September 30, repurchased 3.7 million shares for $160 million. In the fourth quarter, the company's board of directors authorized the repurchase of 15 million shares.

Back in May Digital filed a patent infringement suit against Intel, alleging that it used ten of its patents. Intel subsequently countersued, saying Digital violated 14 of its patents.

Digital's revenues fell 10.4 percent to $13 billion in fiscal 1997, compared with the previous year. But the company managed to turn out a profit of $140.9 million, compared with a loss of $111.8 million a year ago.

And in the first quarter, Digital posted virtually flat revenues of $2.96 billion, up slightly from $2.91 billion a year ago, due to a weak economy and currency in Europe. The company, however, pulled in a profit of $25.1 million in the quarter, compared with a loss of $65.9 million a year ago.

Digital's stock has been on an upward ride since April. The company's shares have been climbing since hitting a 52-week low of 25 a share. But Digital's shares today closed at 45-1/4 a share, down 5-5/16 from Friday's close, as the markets plummeted with some of the largest one-day declines in recent memory.

Investor sentiment apparently also has improved since last spring, when a New York broker/dealer held a meeting of institutional investors to complain about Digital's lackluster stock price and its struggling marketing and advertising efforts.

(Intel is an investor in CNET: The Computer Network.)

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