Source: Prudential Sec.Equity Research
4/13/99
Summary of Pre-announcement Conference Call
Yesterday, Compaq held a conference call to discuss preliminary 1Q expectations for
$0.15 EPS and $9.4B in revenues. Prior to the company's pre-announcement on Friday,
we had been modeling $0.31 EPS (in-line with street expectations) and $9.6B in
revenue.
Management highlighted four factors which caused the earnings disappointment. 1)
weakness in corporate PC demand vs. expectations; 2) increases in price
aggressiveness; 3) weakness in high-end demand vs. expectations at quarter-end; and
4) negative product mix shifts stemming from factors 1-3.
PC demand was noted to have accelerated toward the end of February and through
March, but not enough to compensate for weakness earlier in the quarter. By
geographies, PC demand in the U.S. was indicated as being below expectations; Europe
was in line with anticipated levels, although becoming increasingly competitive;
and, the Far East was generally described as improving, with market conditions in
China and Japan stabilizing.
Positively, the company's services business remains strong, cost cutting initiatives
are tracking to plan, and channel inventory levels remain flat, sequentially. The
company's own inventories were said to be up - although with improved inventory
turns.
The outlook was for a return to normal seasonal demand patterns following a
weaker-than-expected 1Q, although management is anticipating a 2H demand pickup from
consumer and SMB buying ahead of Y2K.
Compaq's strategy going forward will be centered on: 1) improving supply chain
operations; 2) accelerating cost reductions; 3) efficiently completing the Digital
integration; and 4) growing the services business.
Compaq is expected to highlight its enterprise strategy at the company's Innovate
'99 conference for global customers, which will be held in Houston today. We will
follow up with any meaningful incremental information.
Outlook and Investment Recommendation
Yesterday, in response to the pre-announcement, we reduced our FY99 and FY00
earnings forecast to $1.40 from $1.80 and to $1.95 from $2.40, respectively.
Correspondingly, we lowered our price target to $49 from $60. While expectations
for FY99 and FY00 still need to be officially re-calibrated, we believe that the
outlook is improving from current levels.
We have maintained our investment recommendation on the shares. We believe that the
broader macro environment has improved, which will favorably impact the results of
all PC vendors in the second quarter. While we believe the shares will trade
relatively flat near term until expectations are more formally re-calibrated and Q2
visibility improves, we are more inclined to be a buyer than a seller at these
levels.
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