Compaq hits the numbers, but profits take a dive

Summary:Aggressive price cutting and slow commercial sales have hurt Compaq Computer Corp., which today posted a dramatic drop in net income for the first quarter.

Aggressive price cutting and slow commercial sales have hurt Compaq Computer Corp., which today posted a dramatic drop in net income for the first quarter.

And it will be at least one more quarter before the company is back on track, executives said.

"It's a transition process," said Louis Mazzucchelli, analyst at Gerard Klauer Mattison in New York. "Whenever you're in the middle of a transition, anything can happen. I think once they get through this, they're well-positioned strategically, but this is going to be a tedious process. It will take a quarter, maybe two before they out of it."

Compaq's (CPQ) stock was up 63 cents to $26.69 in morning trading.

The company reported net income of $16 million, or one cent per share, down from $414 million or 28 cents per share in the year ago quarter. Sales did rise slightly during the quarter, hitting $5.69 billion, compared to $5.27 billion in the year ago period.

The Houston company has been hit particularly hard in the North American commercial segment, analysts said.

"The enterprise is clearly a much more competitive market, and [Compaq said] margins are not expected to return [to previous levels]," said Ashok Kumar, analyst at Piper Jaffrey in Minneapolis.

"And the bulk of what they have in the channel now is based on the Pentium which is clearly obsolete. Clearly, what Dell is doing is twisting the knife in their back. We expect Dell to pick up marketshare," Kumar added.

Pressure in the desktop market, which has seen dramatic drops in average selling prices, was expected. But analysts said Compaq said the pressure was extending to low-end servers as well.

But on the upside, the consumer pricing pressures seem to be dissipating. Revenues there grew about 50 percent in the North American market, said Kumar.

But while Compaq's first quarter loss was steep, analysts were expecting it. The company's numbers were in line with those predicted by a First Call survey of analysts. Analysts had lowered their figures dramatically after Compaq warned last month that sales out of the channel were not what the company had hoped for.

Today, investors were more anxiously looking to the company's statements about the current quarter, just as they were waiting for Intel Corp.'s (INTC) predictions last night.

"It will take another quarter of adjustment to put the company's core business on a track of improved profitability," Chief Financial Officer Earl Mason said in a release.

The company expects another break-even quarter then, Compaq officials told analysts during a conference call. That's below the roughly nine cents per share predicted by a First Call survey of analysts.

The company's inventory management, which was wildly askew during the quarter, has improved, with inventory turns rising to 15 and total inventory falling $314 million from the fourth quarter of last year. Improvements and receivables and payables helped boost the company's cash balance to $7.1 billion, up 43 percent from the $5.0 billion declared a year ago.

Compaq hopes to get inventory levels down to about two to four weeks by the end of the quarter, Kumar said.

CEO Eckhard Pfeiffer said in a release that during the quarter the company will revamp its product line and work with the Federal Trade Commission and Securities and Exchange Commission to completes its acquisition of Digital Equipment Corp. (DEC). The Digital deal is expected to be completed this quarter, Compaq officials said.

Topics: Dell, Hardware, Intel, Processors, Servers

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