Jan. 26, 2001, 10:36PM
Compaq sees non-PC lines as its future
Looking for Net profit
By TOM FOWLER
Copyright 2001 Houston Chronicle
Compaq Computer's future has less to do with the boring gray
box it was built upon and more with the powerful machines in a
customer's back room or small devices in his jacket pocket,
executives said Friday.
At the company's annual financial analysts meeting, the No. 1
computer maker described the coming decade as one in which
powerful Web servers will push data and mixed-media content to
home entertainment systems and wireless hand-held devices.
Naturally, this new generation of products will have the Compaq
logo stamped on its sides, said President, Chief Executive Officer
and Chairman Michael Capellas.
"Most of what we will build will be about making the Internet
real," Capellas said. "The world is going back to distributed
computing. I really do believe this is the foundation of how the
world will look."
For the more immediate future, Capellas told analysts to expect
revenues to be slow in the first half of 2001. Its annual growth
projection is 6 to 8 percent, or as much as 4 percent below
previous expectations.
But Capellas said the company will meet expectations of
earnings-per-share growth of 20 percent to 25 percent.
Both at Friday's conference and during informal meetings
Thursday night, company executives kept emphasizing the
growing sales of their high-end -- and high-margin -- enterprise
servers, said Melanie Wyld, an analyst with BT Funds
Management.
While Enterprise products accounted for more than half of sales in
the fourth quarter of 2000 and the year, they generated more than
90 percent of profits for the quarter and 60 percent for the year.
Consumer products rebounded in 2000, but played a decreasing
roll in the company's revenues. In fact, they actually lost $6 million
in the fourth quarter.
"They didn't talk much about PCs, which is clearly a change I
think most analysts want to see," Wyld said. "We don't want them
to continue to lose money in that space."
The signals Compaq sent about de-emphasizing its consumer PC
business were strong. Some analysts interpreted them as its
willingness to either let the business go or to erode to the point
that Compaq loses its top spot in the number of units shipped.
"I get the sense they're staying in the PCs to keep providing it to
their existing customers, but don't expect them to contribute much
to the bottom line in the future," said Chris Kuhn, an analyst with
College Retirement Equities Fund.
Two analysts were so struck by executives distancing themselves
from consumer PC sales that, over lunch, they mused on the
unlikely scenario of Compaq selling off its consumer PC business.
"Who would want to buy a PC business in today's climate?" one
asked. "No one," the other answered.
Capellas said the company will continue to make consumer PCs,
but that the home PC of the future will play a different role.
"The personal computer will become the center of home
entertainment," serving up movies, music and education, he said.
"People still have a love for the computer."
Compaq executives repeated another mantra first chanted in an
earnings call Tuesday afternoon: It will not get in a price war with
Dell Computer or others just to keep market share.
"We will fiercely extend our value proposition to customers, but
as we said repeatedly, getting into a price war on pure price, I'm
not convinced will have any benefit for us," Capellas said.
That approach may lead to more lost market share, but Compaq
has decided to focus on profitability rather than market share.
"Nobody can afford to die," Capellas said, referring to losing
market share, but the company's growing margins in enterprise
servers will allow it to weather the storm. "We can afford to be in
the game longer," he said.
Just as in 2000, enterprise server sales are expected to lead the
charge in 2001, growing 13 percent to 15 percent, Chief
Financial Officer Jesse Green said. The professional services
business is expected to grow 6 percent to 8 percent and the
Internet access device business 3 percent to 5 percent.
While the traditional desktop PC market is expected to have a
compound annual growth rate of 8 percent in coming years, a
new generation of Web-access devices, including Web-enabled
phones and pocket PCs, is expected to grow by 86 percent by
2004, company officials said.
The company's own portable device, the iPaq PocketPC, is on
track to become a $1 billion business by itself, said Mike
Winkler, Compaq's executive vice president of global business.
Compaq has been able to ship 100,000 of the units per month,
but Winkler said it could sell twice as many if production could
keep pace.
When pressed about the competitive landscape, Capellas said
Compaq plans to challenge IBM in the powerful-server category,
Sun Microsystems in midrange servers and EMC in enterprise
storage.
He failed to mention Dell Computer, but Senior Vice President
Mary McDowell spoke of Dell's efforts to move into storage.
"You hear about a passion for the space from Dell, but
aptitude-wise, they lack the tools to play," she said.
Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, said
Compaq's move away from its consumer-PC business makes
sense, given the company's difficulty in making money by
delivering low-priced equipment in bulk.
"It's safe to say that the enterprise side of the business is the cash
cow, but it will only stay that way if they're able to keep
expanding their customer base," Kumar said. "Companies don't
buy enterprise equipment based on dollars per megabyte; they
buy based on reliability and relationships."
That means competitors will have a hard time displacing Compaq
from its enterprise customers, but it means challenges, too.
"It will also be very hard for them to displace IBM and EMC
from their customers without a roadmap," Kumar said. |
