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Compaq awash in red ink
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July 28, 1999: 7:33 p.m. ET
PC firm loses $184M, expects 3Q charge and up to 8,000 job cuts
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NEW YORK (CNNfn) - Compaq Computer Corp., the top-selling maker of personal computers, Wednesday reported a second-quarter loss of $184 million and announced another round of job cuts aimed at reducing the company's bloated cost structure.
The Houston-based company said it expects to slash 6,000 to 8,000 jobs -- representing about 11 percent of its work force -- and close some facilities as part of a restructuring plan that will cost the company between $700 million and $900 million in charges in the third quarter.
The reduction is in addition to 17,000 previously announced job cuts at the struggling computer maker as it battles increased competition from rival firms such as Dell Computer and Gateway.
Last month, Compaq (CPQ) stunned Wall Street by warning it would post a loss in the quarter, forcing analysts to downgrade their estimates from a profit of 20 cents a share to a loss of 11 cents.
For the quarter ended June 30, Compaq recorded a loss of 10 cents a share. Sales rose 17 percent on a pro-forma basis to $9.4 billion, but the company said the growth was not enough to offset higher operating expenses and slimmer margins brought about by the intense competition in the PC industry.
In the year-ago period, Compaq posted an operating profit of $32 million, or 2 cents a share, on $5.8 billion in revenue, not including the charges associated with the acquisition of Digital Equipment.
Including charges associated with the Digital acquisition, Compaq recorded a 1998 second-quarter loss of $3.6 billion, or $2.33 a share.
New CEO predicts turnaround
"We are aggressively taking the appropriate actions to restore the company's growth and financial performance," said Michael Capellas, newly appointed Compaq president and chief executive officer. "The realignment of the company is fully underway, our management team is basically in place and we already offer the powerful solutions and range of products customers need to maximize Internet benefits."
Last week, Capellas was promoted to chief executive officer, replacing Eckhard Pfeiffer who was ousted in April after the company failed to meet its first-quarter financial goals.
Despite the huge losses, analysts said Compaq was able to avert a disaster during the quarter, particularly because the company had projected a loss of 15 cents a share.
Prior to the earnings announcement, Compaq shares rose 9/16 to close at 25-15/16 on the New York Stock Exchange. Its shares inched up to 26 in after-hours trading on the Instinet system.
Kurt King, an analyst at Bank of America Securities, said he expects the company's stock to rise in Thursday trade.
"It's not their platform that's at risk, which is what companies like Apple (AAPL) and Silicon Graphics (SGI) face," he said. "It's an execution challenge they face. We're a long way from saying Compaq is 100 percent healthy, but they're definitely on the right track."
Capellas said in a conference call that the company is "comfortable" with third-quarter estimates for a profit of 5 cents a share and a fourth-quarter profit of 20 cents a share.
More job cuts at Compaq
The 6,000 to 8,000 planned job cuts are in addition to the 17,000 positions the company initially planned to eliminate as the result of its merger last year with Digital. A Compaq spokesman said the firm has already cut more than 15,000 positions.
Capellas attributed Compaq's downturn to inadequate revenue growth, falling gross margins and increasing operating expenses.
Gross margins fell to 20.5 percent from 24.7 percent in the first quarter, due in part to pricing pressures in the consumer PC market. Operating expenses climbed to $2.2 billion from $1.9 billion in the first quarter.
The second-quarter loss caps off what has been arguably the most tumultuous year in the company's history, a year filled with financial disappointments, falling market share, restructurings and executive intrigue.
The tumult came to a head starting in April, when the company warned that its first-quarter profits would be less than half of what First Call estimates had predicted.
Just nine days later, Pfeiffer was ousted by a board of directors movement led by Benjamin Rosen, chairman and co-founder of the company.
Pfeiffer attributed Compaq's shrinking profits to overall weakness in the PC industry, but analysts said the company's troubles were internal, citing the growth of such competitors as Dell Computer Corp. (DELL) and Gateway Inc. (GTW)
King said Wall Street should look forward to more candor from Compaq's new leadership.
"The new CEO is actually forthcoming with details and is telling us the truth," King said. "That hasn't been the case over the past three years."
For the first half of 1999, Compaq reported a profit of $97 million, or 7 cents a share, on $18.8 billion in revenue, compared with first-half 1998 losses (including charges) of $3.6 billion, or $2.35 a share, on $11.5 billion in revenue.
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