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Compaq issues warning
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March 6, 1998: 6:53 p.m. ET
PC maker joins the growing list of high tech firms to warn about 1Q
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NEW YORK (CNNfn) - Compaq Computer Corp. Friday became the latest high tech bellwether to warn about first quarter profits, telling investors it now expects results to be roughly break-even on relatively flat sales.
The announcement, delivered after the end of New York Stock Exchange trading, marked the third time in three days a major technology company warned it would fall short of expectations.
PC business headed for a slowdown?
Industry analysts said Compaq's warning, coming on the heels of similar statements from Intel Corp. and Motorola Inc. earlier this week, provides strong evidence that the worldwide computer industry, one of the engines of economic growth, is facing fundamentally lower demand.
"There is real trouble in the sector," said John Rossi, managing director at investment bank BancAmerica Robertson Stephens. "We're looking at a pretty tepid market this year."
Demand from Asia has collapsed amid the region's economic troubles, corporate buyers are putting off purchases until Microsoft Corp. releases a new operating system late this year, and corporate technology departments are throwing all their money at fixing their Year 2000 glitches, Rossi said.
That caught Compaq by surprise, which had dropped prices and pushed lots of PCs to resellers and distributors late in the year. But the resellers are still burning off old inventory and are not buying any more.
Compaq shares drop in after hours trade
In after-hours trade, Compaq fell 2-3/8 to 25-1/4 while International Business Machines Corp. dropped 1-5/8 to 96-1/2 and Dell Computer Corp. tumbled 6 to 132-1/2. Dell's quote is before a 2-for-1 stock split that is slated to take effect on Monday.
Compaq, the world's largest supplier of personal computers, had been expected to post a profit of 35 cents a share for the quarter, according to First Call.
Earl Mason, Compaq's senior vice president and chief financial officer, said the shortfall was primarily associated with the North American commercial market, where Compaq plans additional price cuts to meet very competitive conditions.
"We looked closely at our market and business plan once it became clear that sales out of our North American commercial channels were not meeting our expectations," said Eckhard Pfeiffer, Compaq's president and chief executive officer. "We are putting in place price reductions and aggressive promotions in the first and second quarter to reduce these channel inventories and accelerate the implementation of our Optimized Distribution Model."
Compaq trying to be more like Dell
Compaq has been struggling to reduce its inventory levels to better compete with more nimble rivals like Dell Computer Corp. (DELL) and Gateway 2000 Inc. (GTW). Industry estimates put Compaq's inventory levels at around six weeks of sales. Compaq has been trying to cut that in half to three weeks through its Optimized Distribution Model (ODM) program.
"With these actions, we are attempting to achieve channel inventories that support ODM by the end of the second quarter," said Pfeiffer. "Our outlook for the second quarter is cautious as we continue to assess the North American commercial market environment."
Earlier this week Compaq announced price cuts on its Armada notebook computers.
On Wednesday, chip giant Intel Corp. (INTC) stunned investors by warning its first quarter sales would be about $5.85 billion, or about 10 percent below the fourth quarter's level. The bombshell sparked a sharp decline in Intel's stock price and other tech stocks as well.
Motorola feeling the pinch in Asia
On Thursday, Motorola said first-quarter profits will fall well below expectations because of economic turmoil in Asia. The company elaborated on its forecast Friday, telling analysts first-quarter earnings will be at least 25 percent lower than Wall Street had expected.
Prior to Thursday evening's announcement, analysts had a consensus estimate for Motorola of 47 cents a share for the current quarter, ending March 31, compared with 53 cents in the year-earlier period. But analysts were guided lower by company officials during a conference call Friday morning.
Compaq reported a profit of $387 million or 27 cents a share in the year-ago quarter on sales of $4.8 billion. 
-- by staff and wires
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