Compaq trumpets PC resurgence

It's taken a whipping from Dell, but Compaq says new focus on 'profitable growth' will ensure a comeback

Compaq executives say their PC business is back on track following a bloody battle with cross-state rival Dell.

The Texas-based PC maker announced second quarter earnings last week that were in line with Wall Street expectations, despite parts shortages that limited the availability of some PC models.

"Compaq is healthy and Compaq is back," said Mike Winkler, a senior vice president.

The PC maker is now focused on "profitable growth", Winkler said. Such growth will likely come from Compaq's entries into services and new markets such as storage and Internet appliances. Compaq, for example, announced a number of network storage products Monday.

However, the core of this drive will be Compaq's effort to refocus and streamline its PC business.

That's Winkler's job. Winkler, 55, who is also general manager of Compaq's Commercial Personal Computing Group, says the company will focus on areas including notebook PCs and Internet appliances to revitalise its bottom line and its position in the market.

Compaq also plans to maintain a tight relationship with Advanced Micro Devices (AMD), with a good possibility of offering the company's chips in its corporate desktops and servers.

For much of the late 1990s Compaq was the top seller of PCs in the United States. But Dell, taking advantage of Compaq's management turmoil and lengthy acquisition of Digital Equipment, blasted into the top spot in 1999.

Dell has an 18.7 percent share of the market, Compaq 14.5 percent, according to market researcher Dataquest. Compaq is still number one worldwide, however, with a 12.6 percent share versus Dell's 10.6 percent -- but Dell is gaining.

Analysts who watch the PC business agree that Compaq is in much better shape these days.

"I think that [Compaq] has stabilised. It has turned a corner in its PC business [in terms of profitability]," said Bruce Stephen, a researcher with IDC. "I give Compaq credit for sticking to the plan and for staying on course."

However, "I do still think there are significant challenges ahead," Stephen said. Despite its progress so far, "I don't think I could say Compaq is ahead of the competition."

This is because the PC market is more competitive than ever with Dell, IBM and Hewlett-Packard presenting strong product offerings in the corporate market. Gateway is doing the same in small and medium-business arenas.

Meanwhile, the consumer market, where eMachines and HP present Compaq its main competition, has begun to soften, Stephen said.

Knowing the competitive landscape, Compaq has given up trying to buy market share with super low pricing, Winkler said. Instead, the profitable growth philosophy has it working to create strong offerings in the notebook market, while expanding into Internet appliances.

Notebooks PCs currently enjoy higher growth rates and profit margins compared to desktop PCs. Compaq notebooks sales, for example, grew 31 percent year over year in the second quarter.

Compaq is also working to deliver Internet appliances. It will do so as soon as next month, Winkler indicated.

Compaq's ace-in-the-hole, however, may be its iPAQ. IDC has noted a stronger than expected adoption of legacy-free PCs by corporations. To date, Compaq has shipped about 100,000 units of the stripped-down PC.

It could be a major windfall for Compaq, which is planning to offer new iPAQ models next month.

"You'll see a major announcement next month that will offer a significant expansion of the iPAQ line," Winkler said.

However, iPAQ is still quite difficult to get a hold of. Winkler reports that iPAQ sales have been strong, despite shortages of processors, motherboards and other components, such as capacitors.

Compaq's iPAQ supply is "tight but manageable. We're not losing customers or orders as a result [of supply problems]," Winkler said.

Although Compaq had trouble getting processors from Intel, the bigger issue has to do with competition with cell phone makers to procure capacitors, resistors, flash memory and EPROMs. Some of these components have lead times up to 50 weeks, he said.

Winkler indicated that supply of Intel chips has improved.

The PC is entering a new generation, Winkler said. After a period of invention and proliferation in the 1980s, the PC market was faced with a period of standardisation and commoditisation in the 1990s.

"It's coming back into a third phase of innovation and differentiation," Winkler said. "I don't subscribe to the PC is dead philosophy."

While it looks to new markets with Internet appliances, Compaq is also working to streamline its more traditional product offerings such as the DeskPro line of commercial PCs. By year's end, the company will have cut back DeskPro from thousands of possible configurations to tens of configurations. The move will help cut costs and may also make life easier for customers.

"We found that customers liked the simplicity [of the iPAQ line]," he said.

As a result, Compaq will soon announce a major overhaul of its DeskPro EP line. The new DeskPro EP, coming later this year, will be a "much simpler product line that has better cognisance of the iPAQ product line," Winkler said.

Compaq's goal is to allow customers to choose from a good, better and best configuration, instead of sifting through multiple options. Compaq also recently launched a much simplified Deskpro EN lineup.

It's likely that Compaq will stay away from using AMD chips in its new corporate systems in the second half of the year.

"We continue to have a good relationship with AMD, but we have not seen, yet, a significant demand in large corporate environments for non-Intel processors," Winkler said.

However, Winkler expects corporate customers, who are averse to taking risks, will "come around" when they observe that there are few compatibility issues with AMD chips. And when corporate buyers become more comfortable with AMD, Winkler expects they will opt for the fastest chip with the lowest cost, irregardless of the manufacturer.

Winkler said Compaq's Industry Standard Server Division is working with AMD on its next-generation processor, a 64-bit offering codenamed Sledgehammer. AMD officials have said the chip will begin sampling in the first half of next year.

In the end, however, Compaq officials said it will win on innovation.

Compaq president and chief executive Michael Capellas "is going back to [Compaq's] roots of technology innovation and engineering," Winkler said. "Engineering will be the differentiator."

The PC maker has set goals for double-digit growth in the second half of the year.

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