This is a generally negative or cautionary article on COMPAQ in this mornings WSJ. One comment is that there is a worry in the market that earnings will show a small operating loss and an analyst is quoted to that effect: another that the search for a CFO has held-up necessary cost-cutting measures; another that there has been defection of managers; another that Capellas is doing a lot of stop-gap emergency work calming customers. Very worrying is the comment that the personnel cuts are not much advanced. The strongest positive comment is on strong server sales: another comment is that COMPAQ is still a leading company being priced as though it were distressed at 20% below its annual sales.
October 25, 1999
Tech Center
Compaq's Turnaround Hits a Bump,
Shares Slide on Earnings Concerns
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Three months ago, Michael D. Capellas, Compaq Computer Corp.'s new chief executive, promised a company able to move "at Internet speed." But the turnaround is still very much a work in progress.
On Friday, shares of the world's largest PC seller fell 31.25 cents to close at $18.6875, another new 52-week low, on worries its third-quarter earnings due out Tuesday could show an operating loss. Analysts surveyed by First Call/Thomson Financial project an operating profit of $85 million, or five cents a share, before a charge of about $900 million for layoffs and plant closings.
But William C. Conroy, an analyst with Sanders Morris Mundy, sees too-high expenses producing a small operating loss on revenue of $9.8 billion in the quarter ended Sept. 30. "My thinking is Compaq is still defining what the problems are, and where the solutions lay. It's not yet in the execution phase," he says.
Meanwhile, archrival Dell Computer Corp. continues to race ahead in the U.S. PC market, according to estimates to be released Monday by two market researchers. Dell outsold Compaq in the latest period, grabbing an 18% share of U.S. PC sales compared with 16% for Compaq, according to an estimate by International Data Corp.
Dell Beat Compaq in Third-Period U.S. PC Sales
Company Profile: Compaq Computer
"If Compaq doesn't get its ducks in order, there's a good chance that Dell can overtake it in the world-wide PC market as well," says IDC director of PC market analysis John Brown.
Such challenges don't leave Mr. Capellas lots of maneuvering room. While struggling to repair a corporate PC business dogged by more nimble rivals, he is continuing a restructuring begun earlier this year to market bundles of computers and services against International Business Machines Corp., Hewlett-Packard Co. and Sun Microsystems Inc. He also is preparing yet another attempt at unscrambling the company's Internet and dealer sales effort. Mr. Capellas declined to be interviewed.
Meanwhile, a dragged-out search for a new chief financial officer has complicated cost-cutting efforts. People close to the Houston company say the six-month-old hunt has been delayed by efforts to land a big-name CFO. A spokesman said the search is ongoing and "very active."
Mr. Capellas, the company's former computer-operations chief, has been working on stemming the defections among Compaq managers and calming corporate customers he will need to create a turnaround. In recent months, he has met with 60 of Compaq's top customers, and held dozens of morale-boosting meetings with employees in the U.S., Mexico, France, Germany and England.
So, too, Mr. Capellas is still working on getting its product and field-marketing organizations together. In June, he announced plans to fold its regional marketing operations under the bigger product groups. A month later, he outlined plans for a new 6,000- to 8,000-job cutback. The majority of the cuts are still to be made, according to people close to the company.
In one more attempt to coordinate its Internet and dealer sales, the company is putting final touches on a plan to combine an Internet-oriented sales group with its dealer sales efforts. One aspect of the plan being considered is the phase-out of a separate line of server computers designed for small businesses, according to people close to the company.
At present, Compaq sells two separate lines of PCs, one for corporate buyers and another for small businesses. "We continue to tell Compaq there isn't a justification for both," says Bob Wilkins, senior vice president of sales and marketing at small business reseller PC Connection Inc.
The PC-price wars aren't offering any respite. Analysts say Compaq's operating expenses are nearly twice those of rival Dell, which has pioneered the use of the Internet sales, and now is targeting Compaq's most profitable business, PC servers.
Not everyone is so dire. PC Connection's Mr. Wilkins says Compaq's PC server business "is just incredible. Our server marketing with Compaq has jumped." Jonathan Ross, an analyst at ABM Amro Inc., agrees, saying Compaq "is still the world's largest PC maker, has a great brand name and a wide breadth of offerings."
But Mr. Ross, who rates the company "outperform," admits most investors aren't ready to predict a turnaround. At the current stock price, Compaq is valued at just $32 billion -- far below its projected $40 billion in 1999 revenue. "The market is pricing this company practically like it's a distressed situation," says Mr. Ross.
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