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Compaq misses, warns
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April 23, 2001: 6:54 p.m. ET
PC maker misses lowered target, sees substantial 2Q shortfall
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NEW YORK (CNNfn) - PC maker Compaq on Monday turned in a first-quarter profit that narrowly missed lowered expectations and substantially lowered its financial targets for the current quarter.
The company also upped the number of jobs it plans to cut as part of its restructuring plan to 7,000, representing about 10 percent of its global workforce.
After the close of trading, Compaq said it earned $200 million, or 12 cents per share, during the quarter ended March 31. That was in line with company's lowered forecast for a profit ranging between 12 cents and 14 cents per share, but down from the 16 cents-per-share profit it reported during last year's first quarter.
It also fell short of the consensus estimate of analysts polled by earnings tracker First Call, which was for a first-quarter profit of 13 cents per share.
At $9.2 billion, Compaq's first-quarter revenue fell 3 percent from the $9.5 billion it reported last year but was on the high end of the forecast executives provided when they said they were aiming for sales ranging between $9 billion and $9.2 billion.
Compaq lowered its first-quarter financial targets in mid-March. Prior to that, the company had been expecting its bottom line to be between 20 percent and 25 percent higher than it was during the same quarter last year.
Shares of Compaq (CPQ: Research, Estimates) fell 86 cents to $20.65 in New York Stock Exchange trade ahead of the earnings news, which was released after the closing bell. They fell another $1 to $19.65 in extended-hours trade.
In a teleconference with analysts Monday evening, Michael1 Capellas, Compaq's CEO, said the company is expecting sales to drop to about $9 billion in the current quarter and earnings to come in at 5 cents per share.
Previously, analysts polled by First Call had pegged a first-quarter profit of 17 cents per share on $10.1 billion in sales.
Jeff Clarke, the company's CFO, also said the total number of job cuts will be 7,000 instead of the 5,000 Compaq previously had set. The company expects to take a $250 million restructuring charge during the quarter.
Much of the shortfall can be attributed to Compaq's efforts to reduce inventories, Capellas said. During the first quarter, the company reduced inventory by $250 million.
"During the second quarter, we'll reduce inventory across the entire supply chain by almost half-a-billion dollars and fundamentally change the way we price and manage inventory," Capellas said. "We're also making structural cost reductions that will produce annualized savings of more than $500 million and will be much more aggressive with pricing and programs to drive demand generation in our core markets."
Compaq's first-quarter gross margin was 22.7 percent of revenue, down slightly from the same period a year earlier. Executives attributed the decline in large part to pricing pressure, particularly in the U.S.
Some of that pressure came from its cross-state rival Dell Computer (DELL: Research, Estimates), which overtook Compaq as the world's No. 1 supplier of PCs, according to preliminary research released by Gartner Dataquest and IDC last week. By Dataquest's count, Compaq's unit shipment growth during the quarter stalled at 3.9 million, giving it roughly 12.1 percent of the global market share.
At the same time, Dell's first-quarter PC shipments grew 34.3 percent to 4.16 million, giving it 12.8 percent of the market, according to Dataquest. Analysts attributed the shift to aggressive price cuts on the part of Dell.
Those same reports showed that the PC market in the United States, which has been a sore spot for all the top-tier vendors lately, contracted during the first quarter for the first time since industry analysts first started tracking the market in the mid-1980s.
"Like the rest of our industry, Compaq is facing a tough market in the U.S.," Capellas said.
"Given the difficulties in this market environment, our first quarter performance reflects solid global execution," Capellas added, noting that revenue sales outside the U.S. accounted for 61 percent of Compaq's total revenue and non-U.S. revenue actually rose 17 percent.
Compaq said revenue from its "access" business -- which includes consumer and commercial PCs -- was down 7 percent. That unit posted an operating loss of $82 million. Executives said they expect it to return to profitability in the second half.
Meanwhile, revenue from the company's enterprise business, through which it sells servers and storage devices, was down 2 percent from the same period last year. That unit posted an operating profit of $132 million, Compaq said.
Sales from Compaq's global services division rose 3.8 percent and it posted an operating profit of $254 million.
Capellas shrugged off Compaq's losing the top-spot among PC makers to Dell, saying it's not that important in the longer-term view. "We are No. 2 in the traditional PC market, but we're focused on industry leadership in the next generation of Internet access devices and wireless mobility," he said. "That's where the growth and the profitability will be."
Moving forward, Compaq's longer-term strategy involves extending its services business beyond the traditional PC and into the next generation of computing devices, such as handheld computers like its popular "iPAQ" PocketPC. Handheld devices now account for about 11 percent of total unit volume, he said.
The company also is shifting its business to include sales of more servers and storage products over the long term.
In the shorter term, Capellas said Compaq will continue to focus on five key improvement initiatives including additional reductions in its structural costs, permanent inventory reductions, aggressive pricing, increased investments in innovation and broadening its global services. 
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