CPQ ( $14.50) sees slump deepening despite positive signs
By Peter Henderson
SAN FRANCISCO, July 25 (Reuters) - Compaq Computer Corp.
(NYSE:CPQ - news) on Wednesday posted sharply lower second-quarter profits and sales, and said revenue would continue to slide in the coming months as a worldwide slump spread.
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``It's an understatement to say that we're in the midst of an extremely challenging global market,'' Michael Capellas, chairman and chief executive officer, told a conference call.
Executives pointed to signs of U.S. corporate stability but said consumers were skittish and Asian growth would deteriorate, following U.S. and European weakness.
The No. 2 maker of personal computers, aiming for a future in services, forecast that operating earnings per share would roughly double in the third quarter from the current period, but could lag current Wall Street's consensus target.
Second-quarter pro forma net earnings, which exclude one-time charges, fell to $67 million, or 4 cents per diluted share, from 21 cents per share in the period a year ago.
Sales fell to $8.45 billion in the quarter ended June 30 from $10.14 billion in the same quarter a year earlier.
``If you look at the one thing that sticks out like a sore thumb as the reason for the revenue declines and such, it is the dramatic decline in the consumer market, not just in North America, but on a worldwide basis,'' Executive Vice President Mike Winkler told Reuters in an interview.
Shares of Compaq, which have underperformed those of global PC leader Dell Computer Corp. (NasdaqNM:DELL - news) by around 70 percent this year, were steady in after hours trade around the $14.12 level at which they closed on the New York Stock Exchange.
``We're kind of on the fence right now,'' said Harshal Shah, a portfolio manager at Fremont Investment Advisors. ``More than anything, the valuation is just attractive. Pretty much it seems as if most of the negative news is out.''
He said Compaq now had to prove it could improve, primarily in its services sector, the linchpin of a company restructuring plan. ``Compaq now is kind of a show me story,'' he said.
Asian growth would slow and Europe and North America would be roughly stable, as if nearing the bottom of a bowl, Winkler told Reuters.
``What you are probably seeing is that Europe is probably at the bottom of the soup plate as North America is.''
``We have certainly, we believe, seen the bottom in the commercial side and have some inklings of the beginnings of an upturn,'' in North America, he said. Some companies were beginning to restart technology projects shut down during the economic slump, and others were looking to trim costs by turning to Compaq's services unit, he said.
But Capellas was even more cautious, also pointing to Latin American weakness.
``Before anybody draws the wrong conclusion, you're not seeing me say that you're seeing a huge pick-up. What we are seeing is stabilization in the key markets, and we are seeing a little more activity with the commercial accounts. Retail side is still pretty tough,'' he told the conference call.
Winkler said the company had hopes that the new Microsoft Corp Windows XP operating system and back-to-school season would nudge consumers to buy and that that division could be profitable in the fiscal fourth quarter.
Analyst were nervous about spreading instability. ``Europe and Asia Pacific were the engines of what growth and stability there was,'' said Wit SoundView's Mark Specker. ``To see them slowdown is a bit frightening.''
``The deterioration in Europe and international markets is much worse than I thought,'' said Bernstein's Vadim Zlotnikov.
RESTRUCTURING
Compaq has staked its future on on its ability to cut costs and improve services. It would cut inventory held by it and resellers by $300 million this quarter and shed more employees to meet the 8,500 job cut goal for the year, executives said.
``The permanent improvements we are making in our business model are having a positive impact now,'' Capellas said in a statement.
Including a $493 million restructuring charge, Compaq posted a net loss of $279 million, or 17 cents per diluted share in the second quarter, compared to a profit of $388 million, or 22 cents per diluted share a year earlier.
Third-quarter sales will dip to $8.0 billion to $8.4 billion, bringing earnings per share of 7-9 cents, Compaq forecast.
Wall Street analysts polled by research firm Thomson Financial/First Call had expected earnings of 4-15 cents for the third quarter, with a consensus of 9 cents.
``The services business does seem to be the bright spot,'' said Zlotnikov.
But, he said, ``This will be the first year in close to 40 years you'll see a decline year over year in capital spending or sales of technology,'' referring to the dawn of the computer age. |
