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Compaq plans overhaul
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June 25, 2001: 12:20 p.m. ET
Computer hardware heavyweight retrenches, inks chip deal with Intel
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NEW YORK (CNNfn) - Compaq Computer plans a huge overhaul that will see it offer packages of computers, software and services instead of just hardware, the company confirmed Monday.
The company also announced a strategic technology alliance with Intel, the world's largest microprocessor maker, under which Compaq will use Intel's "Itanium" processors in all of its next-generation network servers by 2004 and will license to Intel the technology it uses in its own "Alpha" processors.
Compaq CEO Michael Capellas outlined the Houston-based company's new strategy in a memo to employees released Monday that calls for transforming the company over the next six months.
Among the new directions outlined in the memo, which was dated June 12, is an emphasis on computer services, including allocating up to $500 million for worldwide acquisitions in the field.
"Given the changes in customer buying patterns, we must place a far greater emphasis on selling integrated, repeatable solutions that create value for customers," the memo said. "We use the word 'solutions' a lot within Compaq, but in this context it means the integration of hardware, software and services -- from Compaq and our partners -- to solve customer and industry-specific problems."
Within four years "our goal is to increase services from about one-fifth of Compaq's revenue today to one-third," Capellas wrote.
Compaq (CPQ: up $0.27 to $13.77, Research, Estimates) also aims to cut operating costs by $200 million per quarter from its first-quarter level. Its goal is a 20 percent reduction in indirect manufacturing costs. It also aims to cut inventories and improve its supply chain management so that inventory costs are cut $1 billion across the supply chain by the end of the year.
The company, which fell to second place behind Dell Computer Corp. (DELL: up $0.47 to $23.88, Research, Estimates) in terms of personal computer sales during the first quarter, announced plans to cut about 5,000 positions, or 7 percent of its global work force, in March – a move it said would save between $500 million and $600 million annually. There were no job cuts spelled out in the latest cost-cutting plans.
Capellas' memo also sets new market share goals, including a 1 percentage point increase in market share for all volume products, such as personal computers and lower-end servers, during the third quarter, and a 2 percentage point increase in share during the fourth quarter.
The memo said Compaq initially will target four industries: financial services; telecommunications, where it said it already has a critical mass of customers; retail; and government/education. Within six to nine months it will expand its customer focus to health-care, life sciences, media and entertainment as well as manufacturing.
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Last week, several brokerage firms slashed their outlook for Compaq's second-quarter and full-year earnings. Merrill Lynch lowered its forecast to 3 cents a share from 5 cents on sales of $8.3 billion for the quarter. Compaq earned 21 cents a share on sales of $10.13 billion in the year-ago quarter.
According to the memo, the company expects to chop an additional $200 million out of annual operating costs on top of $600 million of cost cuts announced in March.
Separately, Compaq and Intel jointly announced a technology alliance that will be key to each company's strategy for 64-bit computing.
Under the terms of their agreement, both companies said they will work to expand the adoption in the marketplace of Intel's "Itanium" processor family. The Itanium processors, which first became available in systems last month, are based on a 64-bit architecture.
Most of today's microprocessors are "32-bit," which means they process data 32 bits at a time. It also refers to the size of the "pointer," which determines how much data the processor can address directly. Current 32-bit processors can address 4 gigabytes of data. The industry has been gradually moving toward a 64-bit architecture, which multiplies the amount of data the processor can access by four billion.
For Intel, already the world's largest supplier of microprocessors for PCs, Itanium represents a big bet and is the linchpin of its strategy to extend its franchise into the market for next-generation 64-bit processors for high-end servers and workstations. Although Intel has not provided a specific figure, analysts estimate the company has spent as much as $2 billion developing the Itanium chip.
Advanced Micro Devices (AMD: up $0.09 to $24.76, Research, Estimates), Intel's top rival in the PC processor market, also has made a push into the market for 64-bit processors, developing its own chip architecture called "x86-64." So far, only upstart chipmaker Transmeta (TMTA: up $0.30 to $6.06, Research, Estimates) has agreed to license AMD's 64-bit architecture.
For its part, Compaq has agreed to use Itanium chips in all of its server products by 2004. It also will license to Intel the underlying technology for its 64-bit "Alpha" processor which it acquired when it bought Digital Equipment.
Intel also said it will hire several hundred Compaq employees who currently specialize in the company's 64-bit technology. Financial terms of the pact were not disclosed. 
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