Glitches In The System At Dec

Digital Equipment Corp. just can't seem to get all of its engines firing together. A year ago, even as the company's mainstay minicomputer business crumbled, it could at least point to soaring personal-computer sales. Now, just as mini sales are perking up, the $1.8 billion PC unit is losing ground.

Some sure signs of trouble: For the quarter ended July 1, PC sales gains slowed to a 20% year-over-year increase, down from 100% in each of the prior three quarters. Market researcher Dataquest Inc. says Digital's rank in the worldwide PC market has dropped a notch since last year, to 12th place, with just a 2.3% share of the market (chart). PC profits dried up in the latest quarter, and despite a drive to add nationwide PC retailers, DEC's sales expansion has trailed rivals. Weak PC results contributed to a 4.3% decline in the company's overall sales for the quarter, to $3.75 billion.

Earnings were reported on Aug. 1, and reaction was swift. On Aug. 3, the unit's president, Bernhard Auer, and its chief financial officer, John Millerick, "resigned to pursue other plans," as a spokeswoman put it. Both Auer and Millerick declined comment.

SHORT-LIVED SUN. The turnabout is painful for a company that seemed finally to be moving away from the sidelines of the computer industry. Digital's high-flying PC business had the company poised to break into the top tier of PC makers. Under Systems Business Unit Vice-President Enrico Pesatori, a former Zenith Data Systems Corp. executive, it successfully reentered the retail PC market it had abandoned in the 1980s. Auer, a former Compaq Computer Corp. executive, took over Pesatori's PC duties last May when Pesatori was promoted.

But Auer's days in the sun were short-lived. Delays dogged a hot new notebook launch, and the unit failed to recruit new retail chains. Meanwhile, the division's profitability slipped as a result of delays in installing a much-needed financial system for tracking sales and inventory. Says an executive close to the company: "The momentum Enrico established did not keep going."

Digital certainly couldn't sustain its biggest shot at a PC breakthrough. Last November, the Hi Note PC, Digital's first notebook line, won raves as the star of the fall COMDEX computer show. But manufacturing delays left the company unable to deliver product until this year. Market researcher WorkGroup Technologies Corp., which last year projected DEC's notebook sales rising to as much as 400,000 units, has now halved its forecast to no more than 200,000.

Digital's retail expansion sagged under Auer as well. He managed to recruit regional chains such as the Northeast's Nobody Beats The Wiz, but he signed up just one nationwide chain--Incredible Universe. Granted, the competition for key retailers is intense. Hewlett-Packard Co. recently added eight nationwide chains to its list, and IBM is focusing attention on retail with its new consumer PC division. "It has been a little tougher than [Digital] thought it would be," says Casey Dworkin, president of consultant Personal Technology Research Inc.

Pesatori, back as acting president of the PC unit, needs to work his old magic. The first step: Get DEC in on the anticipated fall upsurge in consumer purchases. That's when PC makers do some 40% of their business. He must quickly sign up big consumer chains such as Computer City and Sears, Roebuck & Co. DEC's notebooks need a makeover, too. The 486 line looks dowdy alongside Pentium notebooks from competitors. DEC is hoping to reinvigorate its Hi-Note line this fall with Pentium chips.

Pesatori's best chance for quick results is Digital's PC-server business. The company recently signed an alliance with software giant Microsoft Corp. that makes it the preferred service provider for Windows NT, a popular operating system for PC networks. If he can quickly boost sales of high-margin servers, Pesatori could return the PC division to the black in short order. Analysts say the unit's stall need not turn into a crash--if Pesatori can place Digital's onetime star back in a leading role.