Compaq restructures, anticpates Q2 loss

Struggling Compaq Computer Corp. announced it will take a second-quarter loss and take layoffs as it continues its reorganisation begun with the departure of CEO Eckhard Pfeiffer in April.

As part of the reorganisation, Compaq said it will fold its services group into its Enterprise Computer Group.

The Houston company said it will report a second-quarter loss of up to 15 cents per share. First Call was looking for earnings of 20 cents a share. Compaq, citing PC pricing pressures for its problems, will take a third-quarter charge to pay for its restructuring. Compaq will incur layoffs, but the company would not say how big the reductions would be. But executives said it is planning to cut out "several layers of management."

Under the new plan, Compaq will establish three business groups: the Enterprise Solutions and Services Group, the Personal Computer Group and the Consumer Group. Each group will be aimed at the global market and have its own profit and loss accountability.

The Enterprise Solutions and Services Group, created by combining the enterprise and services groups, represents the largest change for the company. Enrico Pesatori, senior vice president and group general manager, will be at the helm. The new group will peddle Compaq's NonStop eBusiness solutions, which include both products and services.

Compaq said earlier this week that it would focus the NonStop eBusiness solutions at four vertical markets, including telecommunications and manufacturing.

The Personal Computer Group will be run by Mike Winkler, senior vice president and group general manager. Compaq's Consumer Group will continue to be run by Mike Larson, senior vice president and group general manager.

The reorganisation includes the formation of a global Sales and Marketing group for sales across all Compaq business groups. A new organisation dedicated to Compaq's e-commerce activities will also be created, along with a new customer advocacy organisation, which combines Compaq's quality and customer satisfaction organisation and customer advocacy efforts.

Compaq attributed the second-quarter loss to flat revenue and higher-than-expected operating expenses than it saw in the first quarter. Results for the quarter are expected to be announced on July 28. "Pricing pressures in the PC segment, inadequate revenue growth and a non-competitive cost structure are the contributing factors to our expected shortfall," said Ben Rosen, chairman and acting CEO, in a prepared statement.

Once the reorganisation is fully implemented, Compaq says it will eliminate $2bn of its operating costs. Ashok Kumar, an analyst with USB Piper Jaffray, said in a recent report that Compaq's woes were its own doing. "For the current quarter, demand in the retail channel remains robust," Kumar wrote. "With about a third of its sales targeted to the consumer segment, Compaq should be positioned well to enjoy this strength. However, most of the growth in the retail segment is at the lower price point. Compaq, due to its higher cost structure, is not equipped to address this segment well."

In a June 8 report, Kumar lowered his profit expectations to 3 cents a share and predicted Compaq would have to write down a vast amount of inventory. "Compaq is currently sitting on about eight weeks of aggregate inventory -- four weeks internal and four weeks in the channel," he wrote. "The channel is filled with SKUs that are overpriced relative to street value and obsolete products that cannot be moved."

Kumar said that another downward revision of Compaq estimates could "pull the stock down to its volume at price support in the mid-teens."

Compaq also announced that Hans Gutsch, Senior Vice President of Human Resources, has retired from the company, effective immediately. The position will report to the Office of the Chief Executive until a successor is named.

Larry Dignan of ZDII contributed to this report.