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Compaq meets, warns
July 25, 2001: 6:36 p.m. ET

Computer hardware maker meets estimate, sees weaker 3Q
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Compaq Computer Corp. on Wednesday reported a second-quarter profit that matched forecasts but warned that its third-quarter financial results will be below recent expectations.

After the close of trading, Compaq (CPQ: Research, Estimates) said its earnings, excluding extraordinary charges, were $67 million, or 4 cents per share, during the quarter ended June 30. That compares with a profit of 21 cents per share during the same quarter last year and is in line with what executives told the Street to expect when they pre-announced the results on July 10.

Accounting for a $493 million restructuring charge, Compaq reported a second-quarter net loss of $279 million, or 17 cents per share.

At $8.5 billion, Compaq's second-quarter revenue fell 15.8 percent from the $10.1 billion it reported during last year's second quarter, and was slightly more than what executives had told the Street to expect.

On July 10, Compaq said it was on track to meet second-quarter operating earnings expectations despite lower-than-anticipated sales. The company entered the quarter forecasting sales of roughly $9 billion, but took that estimate down to $8.4 billion when it pre-announced the quarter.

Executives blamed the revenue shortfall on economic weakness, which began in the United States and now appears to have spread overseas. Because of the lower-than-expected sales, Compaq executives said they will move more swiftly and go even deeper into their cost-reduction programs.

Compaq CEO Michael Capellas said the economic environment continues to be challenging, and the company expects its third-quarter profit and revenue to fall short of the Street's recent expectations.

"In the short term, the market remains volatile and thus difficult to predict with much certainty," Capellas said in a teleconference with analysts Wednesday evening. "However, we expect third quarter revenue to be in the range of $8 billion to $8.4 billion ... and earnings per share of 7 cents to 9 cents."

Analysts most recently had expected Compaq's third-quarter profit to be 9 cents per share on roughly $9.3 billion in sales, according to a survey conducted by earnings tracker First Call.

Shares of Compaq (CPQ: Research, Estimates) rose 27 cents to $14.12 on the New York Stock Exchange ahead of the earnings news. They fell 22 cents to $13.90 in extended hours trade.

As have many of its counterparts in the information technology industry, Compaq has been cutting staff in an effort to maintain profitability.

When the company reported its first-quarter results in April, executives announced plans to cut 7,000 positions. They recently increased that number to 8,500.

Capellas said 5,100 of those jobs already have been cut, with the remainder expected to be completed before the end of the year, cutting roughly $900 million in annual costs,.

During the second quarter, Compaq's operating expenses were $1.7 billion, a decrease of $102 million from the first quarter and their lowest level in three years, Capellas said,

Compaq also has been stepping up its efforts to reduce its inventory amid continued industry weakness.

During the second quarter, Compaq reduced inventory by $300 million from the prior quarter, while the inventory of Compaq products in the distribution channel was down $400 million, according to Jeff Clarke, the company's chief financial officer.

The company is aiming for a further reduction of $100 million in Compaq and $200 million in channel inventory in the third quarter, Clarke said.

Besides being the third-largest computer hardware vendor, behind IBM (IBM: Research, Estimates) and Hewlett-Packard (HWP: Research, Estimates), Compaq is the second-largest supplier of personal computers, losing the No. 1 spot to Dell Computer (DELL: up $1.40 to $28.01, Research, Estimates) in the first quarter of this year.

The company's products range from PCs to handheld devices to network servers and storage systems. Compaq's services unit, which accounted for roughly 23 percent of its second-quarter revenue, provides consulting, implementation and support services.

Michael Capellas, CEO, Compaq
During the second quarter, Compaq said commercial and consumer PC revenue fell 22 percent. The company said unit shipments of commercial desktops rose 11 percent from the same quarter last year but total PC revenue was lower because of aggressive pricing.

Last week, data released by two technology research firms showed that global unit shipments of PCs fell from the same period a year earlier, marking the first time the industry had contracted on a year-over-year basis in at least 15 years. In response to the deteriorating market demand, all the top-tier PC vendors have been aggressively cutting prices.

Compaq said revenue from its enterprise computing business, which includes servers and storage systems, fell 21 percent in the second quarter from the same quarter last year, due to weaker demand, an aggressive pricing environment and reductions of inventory in the distribution channel.

Revenue from Compaq's services business in the second quarter rose 7 percent year-over-year, and now represents 23 percent of the company's total revenue, up from 21 percent in the first quarter of 2001.

Moving forward, Compaq executives have articulated a strategy under which they will shift their focus toward software and consulting services and away from ancillary hardware operations such as microprocessor development. On the hardware side, they said they will emphasize high-end products, such as servers and storage systems, as well low-end products, such as handheld computers and MP3 music players.

Late last month, Compaq made public an internal memo from Capellas outlining the Houston-based company's new strategy, which calls for shifting its sales and marketing efforts toward offering packages of computers, software and services instead of just hardware.

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The company also has announced a strategic technology alliance with Intel, the world's largest microprocessor maker, under which Compaq will use Intel's 64-bit "Itanium" processors in all of its next-generation network servers by 2004 and cede to Intel the technology it uses in its own "Alpha" processors.

Capellas said the changes in Compaq's business model are having a positive impact, but the economic environment continues to be a challenge to the company in the near term.

"We've seen some stabilization in the U.S. with the exception of the consumer retail segment but the market has weakened in Europe and other geographies," Capellas said. "In this environment, we are focused on improving our business model and executing our strategic plans." graphic