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Compaq sees 2Q loss
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June 17, 1999: 10:16 a.m. ET
World's No. 2 computer maker will realign divisions, slash work force
By Staff Writer Randall J. Schultz
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NEW YORK (CNNfn) - Compaq Computer Corp. warned Thursday it will post a loss in the second quarter and take a "substantial" charge in the third quarter to reorganize its corporate structure, trim jobs and turn its operations around.
Compaq, the world's second-largest computer maker, forecast losses of as much as 15 cents per share for the quarter, stunning analysts who predicted a 20 cent-per-share profit.
It was the second consecutive quarter Compaq has warned investors about an earnings shortfall. Compaq hasn't had an operating loss since the third quarter of 1991.
In an effort to turn things around, Compaq plans a series of changes, including a restructuring that will split it into three divisions, slash management staff and reduce costs by $2 billion. It will also take a "substantial" charge due to the realignment.
"The operational issues that affected Compaq in the first quarter continued to influence our business this quarter," Chairman Benjamin Rosen said.
"While we have the best lineup of products, solutions and services in the industry, we have not performed to our potential."
Contributors to the problems
Pricing pressures, inadequate revenue growth and a non-competitive cost structure were blamed as major contributors to the predicted earnings hit.
Slackening sales, especially in western Europe, hurt the company, and continuing concerns about the Year 2000 computer glitch also have affected buying patterns, officials said.
Wall Street may not have been caught entirely off guard by the announcement. It was the second time this year Compaq warned investors its quarterly results would take a hit.
In April, the company said its first-quarter earnings would be less than analysts expected, a shortfall that resulted in the ouster of longtime chief executive Eckhard Pfeiffer.
In addition, the first half of the year is traditionally weaker for computer makers. In the second half of the year, back-to-school PC buying and holiday sales tend to outweigh earlier weakness.
Rough few months
Still, Compaq and its competitors may be in for a rough ride the next few months, according to Dennis McKechnie, manager of the Pimco Innovation Fund.
Compaq tends to carry a lot of inventory, McKechnie said, which puts it in a tough competitive spot compared to a PC firm such as Dell Computer (DELL), which has little inventory and instead builds to order.
"This is Compaq basically admitting they have too much inventory," he said.
"This may hurt the overall PC industry because if Compaq tries to lower that inventory, there will be pressures which could push other makers to lower their prices, too."
Compaq officials, however, insisted their warehouses weren't overfilled.
"We continue to monitor our inventory constantly," Rosen said. "At this point, we have no indication that there's anything out of the normal nature in our inventories."
The nature of Compaq's problems may run deeper, according to Richard Shaffer, technology analyst at Technologic Partners. He claimed that the PC landscape has changed and Compaq has found it difficult to find new markets without alienating its current customers and partners.
"Compaq built its business on resellers and it was very successful for them but now that model has been challenged by direct distribution, with companies like Dell," said Shaffer.
Compaq said on Thursday it would move more toward the direct sales model. However, it has launched similar moves in the past, only to scale them back after concerns from its reseller network, which stands to lose sales.
Still, the company seems determined to try such a move yet again. Compaq sells its computers mostly through resellers but plans for 25 percent of its business to be direct by the fourth quarter.
Compaq also has found it difficult to adjust to a changing audience, according to Shaffer.
The company proved very adept at selling to business customers but with computers becoming as much a consumer item as a business one, serving the two markets becomes difficult.
"The places where businesses shop are different from where individuals shop," said Shaffer. "Colors and flashiness may appeal to consumers but maybe not to the business market. In fact, they may do just the opposite."
Goals of restructuring
The realignment will attempt to restructure the company's overall production process and shave more than $2 billion in operating costs. Specifically, Compaq hopes to speed up its decision-making strategy, improve its execution and accelerate growth.
To that end, Compaq said it will align its operations into three separate groups: enterprise solutions and services, personal computer and consumer divisions.
Michael Capella, Compaq's chief operating officer, said the company's sharing of systems across the various divisions led to "a model of too many generals" in its 69,000-member workforce.
With the new structure, he envisions a more streamlined top-to-bottom approach in each division, with little change in who the customers deal with. This would lead to some management cuts but he would not specify how many.
Still, Wall Street seems skeptical that Compaq's problems have bottomed and the reorganization means brighter days ahead.
Lou Mazzucchelli, computer analyst at Gerard Klauer Mattson, said an analysts call with Compaq left him pessimistic.
"The sense that I took away from this call is that the problems aren't solved, the solutions are still being developed and, in fact, there are probably additional problems that we haven't heard about that will surface before we're through this," said Mazzucchelli.
"This is a very, very painful process. This is going to be a tough time for this company."
Tumultuous year
It's been a tumultuous year for a company that until a few years ago was the youthful upstart that grabbed market share away from IBM (IBM), only to turn around and face pressure from hungry direct sellers like Dell and Gateway (GTW).
Things came to a head in April, when the company announced it would disappoint Wall Street estimates for its first quarter. In its wake CEO Pfeiffer and chief financial officer Earl Mason were pressured into resigning.
Since then, the stock has suffered. In January, Compaq shares topped the $50 mark, but since then have lost more than half of their value.
In addition to its organizational and sales problems, the company also is dealing with the aftereffects of its $8.4 billion acquisition of Digital Equipment in 1998.
Compaq officials say the restructuring will begin to bear fruit during the next two to three quarters.
Rosen stepped into to take over Compaq on an interim basis while a search was made for a new CEO, a process he said is still ongoing with no final candidates in sight yet.
Often, companies seeking change will bring a new CEO to take the helm and steer it in another direction. Compaq has chosen to begin making changes now before such a candidate has been found.
The company may not have had a choice, however. Compaq is widely held by many institutional investors, Shaffer said, and those investors want to see action. As the company's earnings continue to suffer, the company may feel it doesn't have the luxury of waiting to change course.
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Compaq
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