Compaq Earnings Are Expected to Be Half of Forecast
The Compaq Computer Corp. said late Friday that its profits would be less than half of what analysts had expected, dragged down by declining sales and a shift into lower-margin products.
Compaq said its revenue for the first quarter would be about $9.4 billion, short of the $9.7 billion analysts had expected. And it said that profits would be about $250 million, or 15 cents a share, rather than the expected $540 million, or 32 cents a share.
"The quarter's shortfall reflects lower-than-anticipated market demand and increased competitive pricing in the commercial PC sector," Earl Mason, Compaq's chief financial officer, said in a statement. Compaq officials did not return calls seeking further comment.
Analysts said they had expected that the first quarter would be hard for Compaq, but were surprised by the magnitude of the shortfall.
"It's crash and burn time," Aaron C. Goldberg, the principal analyst with Ziff-Davis, said. Computer companies have been hit hard, he said, because a decade-long cycle of ever more complex software, needing relentlessly upgraded machines to run it, has ground to a halt.
"The action now isn't in software but on the Web," Goldberg said. "And performance isn't determined by how fast your processor is but by how much bandwidth you have."
This effect can be seen in the sharply plummeting average prices for computers.
In June 1998, the average PC sold in a retail store cost $1,141, according to Ziff-Davis research. By the end of last year, the price had fallen to $1,006. By the end of February, it was down to $900, Goldberg said.
Analysts conclude that Compaq has been hit harder than other computer companies because it still does not appear to be in control of its inventory. In the PC business -- where prices fall by 1 percent to 2 percent a week -- every extra machine sitting in a warehouse is an expensive drag on the bottom line.
"We think inventories built up towards the end of last year due to a shortfall in sales," said Robert P. Anastasi, an analyst with Robinson Humphrey. "And that is a drag this year as the inventory is brought into line." In particular, he said, Compaq appears to be running into trouble selling to large corporations, one of its traditional strengths.
Anastasi said that the other big computer companies -- IBM and Hewlett-Packard -- face the same pressure on prices that has hurt Compaq, but they may not have the inventory problems.
The stock market has already realized that Compaq is facing tough times.
Its shares closed Friday, before the earnings announcement, at $30.94, up $1.31 for the day. But the stock has fallen from $51.25 at the end of January, quite a drop amid a buoyant market.
In contrast, Dell Computer Corp., Compaq's main rival, presented a glowing picture of its business at an analysts meeting in New York on Thursday. Michael Dell, the company's chairman, called the PC market healthy.
Dell does not have the inventory problems faced by Compaq because it sells directly to customers, building machines only after they are ordered.
Compaq has been trying to expand its direct sales capability. But analysts said that so far this has had little effect. Indeed, Anastasi said that Compaq's move may in fact be contributing to its sales because of it has offended local dealers in what the computer industry calls the "channel."
"Compaq was so vocal about direct sales there may be some retaliation in the channel," he said.
Dell is also able to use its direct sales capability to talk customers into buying more expensive machines and to add on extras like monitors and memory. If someone buys a low-cost Compaq computer at a retail store, the sales clerk may well talk the customer into a bigger monitor, say, but that sale is likely to be a brand other than Compaq.
The NY Times, 4/10/99
By Saul Hansell
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