PART 2....
continued from "Dithering"
Up against it
Mason says that between 25% and 30% of
Compaq's revenues are now derived from
direct sales, up from 0% just a year ago.
These sales are through Compaq's web site,
telephone orders via its call center, as well as
through its new "Built for You" in-store kiosk
program. Compaq now has about 1,000 of these
booths in stores nationwide, where consumers can
order custom-built machines directly from the
company. The units are delivered in about five days.
The retailer gets a smaller cut than it does from
regular retail, and Compaq hopes these kiosks will
boost both volume and the average price of PCs
sold. Compaq believes that consumers generally
make higher-priced purchases when given the
chance to configure their own systems. Mason
estimates he'll have some 4,000 of these kiosks
installed by mid-1999.
With the help of this kind of progress, "The gap in
price difference between Dell and Compaq was 25%
a couple of years ago," says Cihra, "but now it's
down to 10%. Still, as long as Compaq continues to
use resellers, complete parity on price will be
impossible."
Compaq is expected to look to its enterprise
division, which has significantly higher margins, to
drive company growth. "Our forecast indicates that
enterprise will make up 60% of our revenue stream
by 2000," says Mason, up from what Cihra says
was 41% in 1997. To that end, Compaq picked up
Tandem Computers for about $3 billion in stock last
year to give it a high-end enterprise presence, and
DEC to give it midrange products as well as an IT
services arm.
The trouble is, in the server market, which accounts
for a big chunk of enterprise sales, revenues for
both these companies have been flat. For Tandem,
the problem is that most companies can do without
the expensive, fail-safe machines it makes,
whereas DEC has been hindered by its struggle to
push Alpha chip-based servers in a world dominated
by UNIX and Intel systems. According to
DataQuest's Brown, the combined revenues of all
three companies were $2.59 billion in the first half of
1996; $3.23 billion in the first half of 1997, and $2.8
billion in the first half of 1998. Compare that with
say, Sun, which logged revenues of $800 million for
the first half of 1996, followed by $1.47 billion in
1997's corresponding period and $2.13 billion in the
period after that. Now Dell with its direct sales is
edging into the server market, more than doubling
its sales from $80 million in the first half of 1996 to
$280 million in the same period of 1997 and $590
million for 1998's first half.
"The gap in price difference
between Dell and Compaq was
25% a couple of years ago, but
now it's down to 10%."
Compaq's problems are many, and their solution
will require an extraordinary, if not impossible, feat.
Still, the fact is that Compaq is the solid leader in
sales of both consumer PCs and enterprise servers
and will likely remain as such for the foreseeable
future despite its competitors' impressive growth
rates. After all, a company Compaq's size can't be
expected to match those numbers.
Yet other concerns linger. Last June, Compaq
announced that it would lay off some 17,000
employees between June 1998 and 1999. Yet, to
date, only 6,000 have received walking papers,
leaving another 11,000 to walk the hallways waiting
for the ax to fall, and creating the challenge of
having fewer salespeople to generate even more
revenue.
Other issues are less quantifiable. Many expect
Compaq to succeed with the sales and marketing of
the high-performance Alpha chip where DEC failed,
exploiting the delay of Intel's high-performance
Merced chip. But with or without the delay of its
latest release, Intel's stranglehold on the processor
sector will be tough to shake.
In evaluating the various challenges facing the
world's third-largest computer company, the trick is
to determine at what point Compaq's shares cease
to offer investors growth opportunity. "A lot has to
happen for Compaq to get where it wants to be,"
admits Credit Suisse First Boston Michael
Kwatinetz. He downgraded the stock, which closed
on Wednesday at $31.50, from a "strong buy" to a
"buy" following the DEC announcement last
January. "We're willing to own it, but only at the
right price. As [the stock] gets to the mid-to-high
thirties we advise clients to be cautious because at
that point most of the upside is already in the
stock, so there isn't much left for investors."
ING Baring Furman Selz is looking for a 39% bump
in 1999 revenues, to $43 billion, and for earnings to
rebound from 1998's estimated $0.48 a share to
$1.75 in 1999, if Compaq can indeed keep all of
these plates spinning. The coming year will make or
break Compaq. "How well it transitions to become
an enterprise company offering a full spectrum of
products and services like IBM and Sun, with the
cost structure of a PC company," says Kwatinetz,
"depends on their execution versus that of their
opponents." |
