Commodore Seeks to Prove Turnaround Isn't Fleeting

Commodore Seeks to Prove Turnaround Isn't Fleeting

Now-Lean Concern Aims to Maintain Momentum With 2 New Models

By Hank Gilman, Staff Reporter
The Wall Street Journal

February 26, 1987

At a meeting of Commodore International Ltd. managers in West Berlin last month, Thomas Rattigan asked how many had bought the company's stock a year ago when the price dropped to less than $5 a share and bankruptcy rumors swirled around the troubled computer maker.

"I was the only guy in the room with my hand up," recalls Mr. Rattigan, Commodore's president and chief executive officer.

The lack of faith in Commodore's future also was shared by Wall Street and others within the computer industry. But following massive losses and draconian cost-cutting steps, things are looking up.

The West Chester, Pa., concern has chalked up three consecutive profitable quarters.

In composite trading yesterday on the New York Stock Exchange, Commodore's stock was up 75 cents to close at $14.375 a share.

Now Commodore must prove its turnaround is not just a result of belt-tightening measures. Saddled with a product line anchored by an aging home computer, Commodore 64, the company is betting its future on two new models of its dazzling Amiga machine, which are expected to be unveiled in Europe early next month.

Designed for the business market, the Amiga 2000 will be priced at around $1,500, excluding a monitor. The Amiga 500 is a $600 machine that Commodore officials hope will attract the millions of owners of the company's low-priced home computers. "The Amiga has to be the major growth vehicle for our company," says Mr. Rattigan.

Commodore's introductions come at a time when the faltering personal computer industry seems to be making a turnaround. Moreover, much of the strength is in the market of home computers, which could bode well for Commodore.

Still, the company's task is formidable. The original Amiga 1000 has a proprietary operating system and features impressive graphics and the ability to perform numerous tasks simultaneously. But it hasn't lived up to the hoopla surrounding its introduction two years ago. This is largely because of weak distribution, a lack of software for business users and a botched effort to provide an option to make the machine compatible with International Business Machines Corp.'s personal Computers.

In addition, the personal computer market has embraced operating systems designed by IBM and Apple Computer Inc., which has made headway with its Macintosh computer. An operating system is the internal software that controls a computer's basic operations.

"It's very difficult at this point to introduce proprietary technologies because there seems to be such a movement towards standardizing on software and that's really what the challenge is for Commodore," says John Rotenberg, president of the Boston Computer Society, a 23,000-member computer users group.

A year ago, however, many computer industry analysts, consultants and retailers didn't think Commodore would even be around to consider such issues.

On the strength of its flagship model 64 home computer, which sells in stores such as Toys "R" Us Inc., Commodore earned $143.8 million, or $4.66 a share, on sales of $1.27 billion in the fiscal year ended June 30, 1984.

But as the market for inexpensive home computers crashed, so did Commodore, which depended heavily on the model 64.

The company had a total loss of more than $240 million for the following two fiscal years. In fiscal 1986, sales edged up to $889 million after plunging to $883.1 million a year earlier; bank debt rose to about $200 million and the company technically defaulted on its loan agreements. In fact, Commodore was so desperate that last spring it increased the wholesale price of its trusty model 64 in order to raise cash to operate.

"It sure wasn't the end of the world," Mr. Rattigan said, "but we were close enough to see the end of the world."

Led by Mr. Rattigan, formerly an executive at PepsiCo Inc., Commodore began drastic cost-cutting measures and cut its world-wide work force 35% to 3,100 employees. It closed three plants and swallowed millions of dollars of write-downs to reduce its inventory.

At the same time, the company has reduced its bank debt by almost $100 million and its banks agreed in principle to relax the repayment terms on its remaining debt. As of its second quarter ended Dec. 31, Commodore had bank debt and other long-term debt of $195 million; shareholders' equity was valued at $137.3 million.

But with the bulk of cost cutting behind it, Commodore now must increase earnings by selling more computers. Despite a profit of $21.8 million, or 68 cents a share, the company's sales for the second quarter declined 20% to $270.8 million from $339.2 million a year earlier. The latest quarter earnings included a tax benefit of $5.8 million. The company had a loss of $53.2 million in the year-earlier period.

"They've done one thing very well and that is to lower their break-even cost," says Charles Wolf, a First Boston Corp. analyst. "They've also restructured their debt nicely and that's good. The question is, do they have a product line?"

Commodore officials hope to spur the company's growth by maintaining sales of the model 64 for a few more years, carve out a niche in the so-called IBM "clone" market in the U.S. and place the company's future in the hands of the Amiga.

The 64, which Commodore officials liken to venerable products such as Ivory soap, "will be a very important part of our business," over the next two to four years, says Michael Evans, Commodore's chief financial officer.

Though sales are declining, Commodore has sold about seven million units of the model 64 since 1982. The model currently sells for $230. Mr. Evans expects sales of the model 128, a more powerful $500 version of the 64, to decline rapidly because of the introduction of the Amiga 500.

Meanwhile, Commodore's entrance last month into the overcrowded U.S. personal computer market with two IBM XT-compatible machines puzzled its critics who felt Commodore's arrival was too late to take business from more established companies in the PC clone business, such as Tandy Corp., Compaq Computer Corp. and Leading Edge Products Inc.

But Commodore officials contend the move isn't that risky. The machines already are manufactured overseas -- Commodore is the second largest personal computer maker in West Germany. The company also said it can make money if it sells only 60,000 units this year in the U.S.

The two new Amiga models probably will replace the Amiga 1000, which in 1985 was ushered in at a Lincoln Center bash in New York. Technologically, the computer industry was impressed with the original model, which now has a list price of about $1,295.

The machine displayed 4,000 hues, created cartoons, reproduced music and allowed users to perform multiple tasks. Commodore predicted sales of 150,000 units by the end of 1985.

Instead, Amiga faltered. After struggling for two years, the machine has just reached the annualized sales rate of 150,000 units, according to Nigel Shepherd, Commodore's North American general manager.

For one thing, the machine was too expensive for the home market. Also, software packages, such as spreadsheets, weren't available for business users and efforts to make the machine run software designed for IBM-compatible machines stumbled badly because of product delays and technical problems. Furthermore, big computer retailers wouldn't stock the machine.

The company is betting that many problems will be resolved by offering different machines for home and business users.

Initially, Commodore expects the bulk of the Amiga sales to be generated by the less expensive Amiga 500, which is aimed at the home and education markets. The basic machine, which isn't IBM-compatible, is equipped with one floppy disk drive and 256 kilobytes of memory, the equivalent of 128 double-spaced pages of text.

Commodore also hopes that current model 64 owners -- about 3.5 million in North America -- will buy the Amiga. The company, for instance, is negotiating with one company to manufacture a device that would allow the Amiga to run model 64 software.

Marketing the more powerful Amiga 2000 is trickier, largely because the business market is dominated by IBM-compatible machines and Apple's Macintosh computer in certain segments.

The basic Amiga 2000 comes with two disk drives and one-half megabyte of memory, or 512 kilobytes. The machine's memory can be expanded to nine megabytes, or 45,000 pages of text. For an additional $600 in options, the $1,500 machine also becomes IBM-compatible.

An IBM XT personal computer with 256 kilobytes of memory often sells for less than $1,500, not including a monitor.

Commodore is hoping sales will come from the booming desktop-publishing markets, which is Apple's domain, as well as more specialized users in the music, video, and graphics-related professions. For instance, by using the Amiga, advertising agencies could develop full-color story boards and send them over telephone lines.

But critics contend that the Amiga still faces major obstacles if the machine is to become anything more than a home or niche product. Not only has Commodore's reputation been tarnished by its financial woes, but it faces increased competition from Apple, which has been revamping its product line.

Some analysts also say Commodore continues to have problems with its distribution system. For example, although more than 1,200 independent retailers will stock the Amiga 2000, the big computer chains that cater to business users have shunned it so far.

"If it doesn't happen, they'll have another wonderful machine at a wonderful price that no one owns," says Gregory Drahuschak, an analyst with Butcher & Singer Inc.

Commodore, however, contends that two of Amiga's biggest problems have been solved -- IBM compatibility and software. The new PC-compatible options allow users to utilize the graphics and color capabilities of PC-compatible software. Previous equipment only allowed a transfer of text from PC software programs.

In addition, more than 400 programs have been written for the Amiga and the IBM-compatible options will allow users to run business software such as Lotus Development Corp.'s 1-2-3 spreadsheet package.

"When the (Amiga) 1000 was launched, it was launched virtually naked as far as software was concerned," says Commodore's Mr. Shepherd. "We're not launching a virgin machine here, we're launching a machine with software behind us and that's going to give us a running start."