Compaq woes to continue in Q2

The bad news just keeps coming for Compaq. The company said Thursday it will report a second quarter loss of up to 15 cents per share and revamp its operations. First Call was looking for earnings of 20 cents a share.
Written by Larry Dignan, Contributor on

The company cited PC pricing pressures for its problems. In addition, Compaq said it will take a third quarter charge of $2bn (£1.2bn)to pay for its restructuring.

"The operational issues that affected Compaq in the ">first quarter continued to influence our business this quarter," said Benjamin M. Rosen, chairman and acting CEO. "Pricing pressures in the PC segment, inadequate revenue growth, and a non-competitive cost structure are the contributing factors to our expected shortfall."

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," said Kumar. "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."

Compaq has been on the ropes this quarter. The company ousted then-CEO Eckhard Pfeiffer and financial chief Earl Mason in April. The company has been silent regarding the search for a new CEO. Since the Pfeiffer and Mason departures, Compaq has continually had to reshuffle its management as several key employees left the company. Meanwhile, Dell, Hewlett-Packard and others have been busy eating Compaq's market share lead.

For the second quarter, Rosen said that both revenue and gross margins are expected to be flat to down sequentially from the first quarter, which wasn't too impressive to start with. Compaq said operating expenses will increase from the first quarter due to goodwill amortisation from Compaq's recent Internet acquisitions and the other long-term investments. To spark growth, Compaq also said it will revamp because it needs "significant structural changes" to compete. Compaq will have three global business groups focusing on enterprise products and services, personal computers, and consumer initiatives. Rosen said the goal was to improve execution, speed decision-making, and "get closer to our customers." Compaq said each unit will have bottom-line accountability.

Compaq, which has been haunted by a severe case of brain drain lately, said Enrico Pesatori, senior vice president, will lead the enterprise group. Mike Winkler, senior vice president, will head up the personal computer unit. The consumer Group will continue to be headed by Mike Larson, senior vice president.

The company also said it will beef up marketing, its supply chain and e-commerce program. Compaq mentioned everything except adopting a more direct-sales approach such as the one Dell has. Analysts have been complaining Compaq needs to be more direct for some time.

At least for one analyst, the Compaq problems in the second quarter were no surprise. 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 8 weeks of aggregate inventory -- 4 weeks internal and 4 weeks in the channel," said Kumar. "The channel is filled 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 said expects to announce its second quarter results on July 28.

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