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Compaq issues 1Q warning
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April 9, 1999: 6:49 p.m. ET
Weak PC demand, price war to cut anticipated earnings in half
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NEW YORK (CNNfn) - Compaq Computer Corp., the world's No. 1 personal computer maker, delivered a bombshell Friday, telling investors its first-quarter profits will fall far short of Wall Street estimates because of weaker-than-anticipated demand.
In a statement issued after the market close, the Houston-based company said it expects to earn about 15 cents a share in the quarter ended March 31, less than half the 31-cents-a-share profit analysts polled by First Call had forecast.
Compaq (CPQ) said revenue is expected to total $9.4 billion, up from the $5.7 billion reported a year ago but down from the $10.9 billion in the fourth quarter of 1998. Computer makers usually report lower first-quarter revenues because PC demand slows down after the holiday shopping season.
News of the earnings warning sent shares of Compaq tumbling as low as 26 in after-hours trade from the earlier New York close of 30-7/8. Analysts said other technology giants may be dragged down along with Compaq during Monday trading.
"Dell (DELL) is probably going to come under pressure, Gateway (GTW) is probably going to come under pressure from this, and I think it is just another sign that the earnings season here is going to be pretty mixed there are going to be a lot of potholes," said Terrence Gabriel, stock market strategist at IDEA.
Compaq's news dragged down several technology bellwether stocks in after-hours trade. Dell fell to 39-7/8 from a close of 43-9/16; Gateway slipped to 72-1/2 from 74-11/16; Intel Corp. (INTC) plunged to 126-1/4 from 130-13/16; and Microsoft Corp. (MSFT) dropped to 92-3/4 from 94-1/4.
Weak demand, price war cited
"The quarter's shortfall reflects lower than anticipated market demand and increased competitive pricing in the commercial PC sector," said Earl Mason, Compaq chief financial officer.
"While market conditions will continue to be competitive, we fully intend to expand our business and grow market share profitably in 1999,'' said Eckhard Pfeiffer, president and Compaq's chief executive officer. "The company will continue its aggressive drive of reduction of cost and operating expenses in the face of a very competitive market.''
The growing market for low-cost PCs has been a boon to consumers, but it has cut into the profits of computer makers.
Lou Mazzucchelli, an analyst at Gerard Klauer Mattison, said Compaq's problems lie with its gross margins, meaning sales of its high-end - and high-margin - PC server products were weaker than expected.
"Maybe their product mixture changed in a way that was different from what they expected," Mazzucchelli said. "They're not that far off our revenue forecast, and I don't think expenses are out of control. Perhaps they were selling too many low-cost computers that have bad margins."
Mazzucchelli added that other companies are able to sell low-cost units without taking such a drastic hit to their margins.
"You can't translate this to everyone in the (PC) group," he said. "This should be Compaq-specific."
Compaq had a strong fourth quarter
Compaq is coming off a highly successful fourth quarter, for which it reported earnings 6 cents better than analysts' estimates. The company said strong sales from its distribution channels provided the earnings boost. But Mazzucchelli said Compaq will have to streamline its business as it moves forward.
"They have to make some hard decisions on how to rationalize their channels," he said. "They recently came up with yet another way for small-business owners to buy a Prosignia computer. It's confusing. People don't know where to go. With Dell (DELL) and Gateway (GTW), you just go to their Web site and buy a PC, and you don't have to do all this comparison shopping."
Compaq expects to release results on April 21.
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Compaq
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