January 24, 2001 1:10pm
Compaq disparages rivals' price cuts
By Ken Popovich eWEEK
In a rebuke of its rivals, Compaq Computer Corp.
derided its competitors' recent escalation of a PC price
war, belittling any increases in sales and market share
that they may gain through such efforts as "fleeting."
Marking a sharp contrast to recent vows by Dell
Computer Corp. and Gateway Inc. to continue
aggressive pricing, the world's largest PC vendor
instead insisted it would maintain a more conservative
policy, which it calls the "most reasonable approach for
all."
"We will not price down to the very lowest levels of the
market to chase share which we know is fleeting," said
Mike Winker, executive vice president of Compaq's
global business units, speaking to analysts after the
company posted its fourth-quarter earnings.
"I think we will continue to be more prudent and
reasonable in the pricing world," Winkler said. "We
think the industry will become more settled down,
recognizing that this is the most reasonable approach
for all."
PC makers began cutting prices in late November after
a traditional upswing in holiday sales failed to
materialize, severely undermining computer makers'
profits in what is normally their strongest quarter. Stung
by the sudden downturn, PC makers, including
Compaq, began reducing prices as well as offering
rebates and free upgrades to rekindle sales and reduce
unsold inventory.
Compaq's fourth-quarter earnings revealed the damage
caused by falling demand, with its consumer unit
reporting an operating loss of $6 million, compared to a
profit of $69 million last year. Meanwhile, the
company's larger commercial PC business saw its
operating income dip $20 million from the previous
quarter, down to $113 million, although that still
represented a nearly $200 million improvement over last
year's $79 million loss.
Rough sailing ahead
While Winkler said he expects consumer PC sales to
pick up in the coming months, he added, "We do think
it's going to continue to be an even rougher market, a
much rougher market, in fact, than the commercial
market in the first half of the year."
In an interview with eWEEK, Winkler was particularly
critical of Dell's aggressive PC pricing strategy. On
Monday, Dell executives touted their low-cost initiative
as key to helping the company increase its global
market share, narrowing the gap between it and
Compaq.
"What Dell would like you to think is that [top market
share] takes them to a new plateau in the industry. In
fact, what we have found is that bought share is rented
share," Winkler said. "Share gained purely on price is
only as good as the next buying decision, because
they'll go to whoever is lower in price that next time."
Dell officials did admit on Monday that the aggressive
pricing moves had cut into the company's profit
margins. Several market analysts questioned the
decision to sacrifice profits to boost sales.
"Dell was able to grow revenues, but at the massive
expense of gross margins," said Rob Cihra, a market
analyst with ING Barings in New York, who estimated
Dell's profit margin is now 18.2 percent, its lowest level
since 1996.
Calling the company's low-cost strategy
"ultra-aggressive," Cihra on Wednesday questioned the
"merits of Dell's price-cut approach."
By contrast, Compaq reported yesterday that its gross
profit margins increased 1.5 percentage points to 23.7
percent during the fourth quarter, due in large part to the
company's strong sales of high-end computing
systems, which have larger profit margins than PCs.
'Cutting Compaq off at the knees'
Even taking into account Dell's made-to-order business
model, Compaq's Winkler said he doesn't think his
competitor can continue its low-margin strategy.
"What Dell needs to be worried about is that to
maintain the share they get they're going to have to go
to permanently lower margin levels," Winkler said. "And
I'm not sure their business model can sustain that.
Then you say, 'How do you get out of it without
relinquishing share?' There's no way."
But for the short term, Dell's strategy may prove
successful in luring more price-conscious customers
away from Compaq, said Ashok Kumar, a market
analyst with US Bancorp Piper Jaffray in Minneapolis.
"Dell is doing its best to cut Compaq off at the knees,"
Kumar said. "The areas where they can do it are
primarily in the small and medium business segment,
as well as the consumer segment."
Falling component prices in recent weeks have enabled
Dell to further undercut Compaq's prices, but Kumar
added that low-cost PCs won't be enough to lure away
Compaq's corporate customers.
"It won't have the same effectiveness [with large
business clients] because those customers have
decided to do business with Compaq for a variety of
reasons, not just PCs," Kumar said.
In fact, non-PC sales accounted for a majority of
Compaq's fourth-quarter revenue, with the company's
enterprise computing segment, which includes servers
and storage devices, posting sales of $4.11 billion, up
20 percent from a year ago, and operating income of
$722 million.
Overall for the fourth quarter, Compaq posted earnings
of $515 million, or 30 cents a share, beating recently
lowered Wall Street estimates by 2 cents per share,
according to First Call/Thomson Financial.
Those earning figures exclude a one-time $1.8 billion
charge related to the devaluation of Compaq's
investment stake in CMGI Inc.
Compaq's performance was largely in keeping with
projections it made last month when it first warned that
slumping sales would hurt revenues, Cihra said. Still,
those numbers are respectable, given the tough
economic conditions.
"In a PC market hurt by sharply lower consumer
demand, a general slowdown in IT spending and
aggressive pricing by competitors, Compaq reported 4Q
results at the high end of reduced expectations," he
said.
Opportunities in store
In looking ahead through the rest of this year, Compaq
is predicting growth of only 3 to 5 percent in the first six
months, with stronger sales in the second half resulting
in overall annual revenue growth of 6 to 8 percent, or
slightly below previous projections.
Although Compaq's conservative pricing policy may
cost it some share of the PC market, Chairman Michael
Capellas said that it's more important for the company
to focus on the bottom line.
"The name of the game in this environment is profitable
growth and that means that is what we're going to
drive," Capellas told analysts during a conference call
yesterday. "But that doesn't mean that there are not
opportunities."
In particular, the chief executive said he's very
optimistic about potential sales of electronic devices
that are increasingly being used in conjunction with
PCs, such as personal digital assistants along the lines
of Compaq's handheld IPAQ, digital cameras, MP3
players as well as upgrades such as upcoming
DVD-RW drives.
"We've seen some really innovative new hotspots and
some new markets," Capellas said. "There's a lot of
space to be had in [the PC] sector ... in all the stuff and
capabilities that go around it." |
