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Compaq 1Q as expected
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April 21, 1999: 12:12 p.m. ET
PC maker posts disappointing profit of 16 cents a share; revenue up 66%
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NEW YORK (CNNfn) - Compaq Computer Corp. Wednesday reported first-quarter earnings well below original expectations, citing disappointing sales of its commercial PC business and higher-end enterprise systems.
The Houston-based computer maker said earnings for the quarter rose to $281 million, or 16 cents a diluted share, from $16 million, or 1 cent a share, a year earlier. Revenue for the quarter rose 66 percent to $9.42 billion from $5.7 billion a year ago.
Although Compaq 's (CPQ) first-quarter figure is a penny above the revised consensus of analysts surveyed by First Call, it's well below the 31 cents a share forecast that was indicated for the company before its April 9 announcement that earnings would be about half what was expected.
Compaq said pricing pressures in the commercial and corporate enterprise markets, as well as a less-favorable mix of high-margin products, contributed to its poor performance.
"Despite our overall corporate strength, our first-quarter results are disappointing and unacceptable," said Benjamin Rosen, chairman.
Compaq appeared to have resolved many of the problems that had plagued the company for the past two years when it reported strong fourth-quarter earnings in January. But the disappointing first-quarter results led to the forced resignations of Chief Executive Officer Eckhard Pfeiffer and financial chief Earl Mason.
Compaq shares were down 3/16 at 23-13/16 in morning trade.
Compaq's three-year stock activity
At the time of the earnings warning, Compaq executives blamed the shortfall on lower-than-anticipated demand for PCs and increased pricing pressure.
Analysts, however, questioned that argument, pointing to the continued success of such firms as Dell Computer Corp. (DELL) and Apple Computer Inc. (AAPL).
Analysts said the problem appeared to be specific to Compaq. The company, for example, said it maintained worldwide inventory of less than four weeks during the quarter.
Dell, conversely, reported just six days of inventory during its latest quarterly results.
Though Rosen indicated Compaq hadn't performed as well as it should have, he did point to industry trends as factors that affected the company's quarterly results.
"The personal computer industry is growing," he said. "[But] there was a deceleration of growth in the first quarter."
Although Compaq pointed to pricing pressures in the industry, officials noted that the company was profitable in the low-cost PC market.
"We are currently competing profitably… in the sub-$600 market," said Michael Heil, Compaq general manager, worldwide sales and marketing.
Corporate pricing pressures
Most of Compaq' pricing woes came from the high-end corporate market. Compaq's gross margins fell to 24.7 percent from 26.4 percent in the fourth quarter.
Compaq competes with such industry giants as IBM Corp. (IBM) in the corporate PC market, and Compaq said its competitors have been very aggressive in pricing.
"There is a very competitive situation in the corporate account arena," Heil said. "There is an industry issue of competitive bidding on a worldwide basis."
Last year, Compaq acquired Digital Equipment Corp. to boost its presence in the enterprise market, but the company has had trouble integrating Digital into its operations.
Compaq had to lay off 17,000 employees to make the transition, which resulted in $3.6 billion in second-quarter charges.
"The challenge is to integrate Digital and have an effective enterprise solution strategy going forward," Art Russell, an analyst at Edward Jones, told CNNfn. "The PC business if fairly healthy, with the exception of the commercial space where there are some pricing pressures."
Company to forge ahead
Rosen said the decision to oust Pfeiffer and Mason "was not precipitated by any single event or quarter."
"From 1991 through the next five or six years, the company did spectacularly well," Rosen said. "But in the last two years, the company didn't live up to its potential."
After Pfeiffer's removal, the company established an "office of the CEO" to oversee day-to-day operations until a new CEO is selected. In the meantime, Rosen said the company will move forward with its plans to restructure the company.
"The office of the CEO is not waiting for a new CEO to be selected," Rosen said. "We are going to move forward rapidly."
Russell said he wouldn't be surprised if more Compaq executives leave the company. 
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