Investors will need sharp eyes in coming weeks as computer companies flood the market with good and bad news about new products and quarterly earnings.
After the flood, the mainframe computer market will be a bit more competitive, and the already competitive personal computer market will continue as the industry`s growth area.
The new-product introductions by top mainframe computer makers this week should help deflect attention from recent poor earnings reports. And these manufacturers, who have watched as their customers cut costs by leasing and not buying large systems, or by buying more powerful small systems, also hope the strategy will generate interest in new large machines.
International Business Machines Corp. and Digital Equipment Corp. are to bring new products to the market this week. IBM will announce new versions of its 3090 mainframes, and Digital`s new line is the VAX 9000.
These introductions come on the heels of poor earnings reports last week. IBM, No. 1 computer manufacturer, and Digital, No. 2, reported that profits in the most recent quarter fell substantially because the strong dollar depressed overseas earnings, and customers don`t seem to want new mainframes. IBM reported that third-quarter earnings dropped 29.7 percent, to $877 million from $1.25 billion. Digital`s profit fell 32.5 percent, to $150.8 million from $223.4 million, in its first fiscal quarter, officials of the Maynard, Mass., company said.
Similarly, Unisys Corp. and Control Data Corp. have been stalled by flat demand. Both recently announced layoffs in major restructuring efforts, and both will report their earnings in coming days.
”Customer demand in the U.S. remains slow,” said Digital Chairman Kenneth Olsen, when his company`s earnings were reported. ”Moreover, the continued strength of the dollar depresses oveseas results when they are translated into U.S. currency.”
”Fewer and fewer users are finding it absolutely necessary to their data-processing needs to acquire new computers every year, when used computers are less expensive and have the same functionality,” said Timothy Summers, analyst with Smith Barney, Harris Upham and Co.
But company officials are quick to note that recent quarterly reports are, indeed, short-term results. IBM reported that revenue rose from a year earlier, to $14.3 billion from $13.7 billion in its third quarter and to $42.2 billion from $39.7 billion in the first nine months. Digital officials said revenue for the most recent quarter rose to $3.13 billion from $2.94 billion a year earlier.
The new products and product enhancements are expected to spark customer interest. But manufacturers have had problems bringing crucial new products to market, and during the wait, customers have been reluctant to purchase equipment that is presently on the market, analysts say.
Added to that, when mainframe makers, including IBM and Amdahl Corp., do get new products on the market, they immediately start a discounting war, lowering profit margins on high-end mainframe equipment, said one executive.
”They announce new products, then they discount the hell out of them,”
said Robert A. Bardagy, executive vice president of Rosemont-based Comdisco Inc., a mainframe computer lessor.
”It`s going to be a long slowdown,” Bardagy said, commenting on the poor earnings performances. ”Discounting at IBM and Amdahl makes them indistinguishable. Both need to get better price discipline.”
Even though analysts have recently projected a dreary outlook for Armonk, N.Y.-based IBM, saying it stands to lose some of its 70 percent share of the international mainframe market and its position as the stock market`s leader, others foresee a brighter future.
”We should have newer products (from IBM) to work with next year,” said Martin Ressinger, an analyst with Duff & Phelps Inc. ”It`s still a pretty profitable company. Some of the problems in the third quarter may actually produce better revenues over the next year, specifically increased operating leases.
”Because leveraged buyout activity is increasingly affecting Fortune 500 companies, they are more cost conscious,” Smith Barney`s Summers said.
”Structural changes in America are causing users of IBM mainframes to lease.”
However, leases could turn out to be 20 to 50 percent more profitable than sales in the long run because of finance charges, said Frank Metz Jr, IBM senior vice president of finance and planning.
More powerful smaller machines are also causing business customers to change their views about the more expensive large machines. Mainframe computer sales for 1989 are expected to reach $29.5 billion, up from last year`s $28.6 billion. But the personal computer market is expected to reach $64.4 billion in sales, up from $51.7 billion last year, according to Dataquest, an industry research service.
Hence, Groupe Bull of Paris, which has a 2 percent share of the international mainframe market, is seeking to buy the computer business of Glenview-based Zenith Electronics Corp. in an effort to take advantage of the booming personal computer market.
”We intend to stay a major actor in mainframes,” Groupe Bull Chairman Francis Lorentz told reporters at a meeting last week.
Groupe Bull teamed up with NEC Corp. to produce mainframes, and the
”partnership” concept should benefit Zenith`s computer sales, Bull officials said. They added that Zenith Data Systems will function as a separate firm within the Bull family of companies.
IBM is also involved in a partnership with the leading U.S. retailer, Sears, Roebuck & Co., to offer the Prodigy interactive service for personal computing, part of its marketing strategy for personal computers.
”At the PC end, partnerships have been a hallmark since the beginning,” said Thomas B. Martin, vice president of the computer business unit for NEC Home Electronics (USA) Inc., based in Wood Dale. ”The part of the business we serve is growing at a healthy rate. It`s almost inevitable that large computer makers will partner with PC manufacturers.
”Personal computers have a lot more power now,” Martin added. ”It`s now reasonable for a company to ask, `Would I be better off spending $150,000 on a mini-computer (a machine that is smaller than a mainframe but larger than a PC), or $15,000 on a PC-based system with 95 percent of the same capability?”`
Prosperity in the personal computer market is reflected in improved results at Apple Computer Inc., which reported Friday that earnings rose 49 percent in the latest quarter, though much of the gain was attributed to Apple`s sale of its stock in Adobe Systems Inc., a software company.
Compaq Computer Corp. is expected to have a good report for its latest quarter. Compaq also is expected to introduce a new line of personal computers before the end of the year.
Furthermore, Duff and Phelps` Ressinger adds that the mainframe business has its own growth area in on-line transaction processing, a computing area in which ”specialty” machines handle loads of random inquiries. The segment includes airline reservation systems and automatic teller machines.
