From March 2, 1999 Wall Street Journal
Compaq Is Criticized for How
It Disclosed Sales Slowdown
By SUSAN PULLIAM and GARY MCWILLIAMS
Staff Reporters of THE WALL STREET JOURNAL
Few things shake up Wall Street these days like the prospect
of a slowdown in personal-computer sales.
So when some investors got the word Thursday evening that
Compaq Computer's sales for PCs in the first quarter were
running below perceptions, it caused quite a stir on trading
desks. The next day, technology stocks continued to reel as
word spread further. "It was a major call, and it hit not only
Compaq but also the entire sector," says Seth Tobias, who
runs a hedge fund in New York.
Now, however, questions loom among investors and analysts:
Why did only a chosen few get the word ahead of the rest of
the Street? "The company should have made an
announcement or said nothing," says William J. Milton,
computer analyst at Brown Brothers Harriman & Co.
Mr. Milton didn't find out about the slowdown until Friday
morning, when Compaq's shares were already down 16%.
Later, Mr. Milton, like many analysts, cut his earnings estimate
for Compaq's first quarter -- in his case, to 29 cents a share
from 31 cents a share.
Piper Jaffray Inc. analyst Ashok Kumar called the comments
from Compaq to a small group of investors "a big time leak."
Meanwhile, some traders were buzzing about big block trades
at $40 in Compaq stock after the market closed Thursday,
though it is unclear whether the trades were related to
Compaq's disclosure.
Compaq officials defend the way the information was
released. They say the comments on PC demand were made
to a group of institutional investors visiting the company's
Houston headquarters with an analyst from Credit Suisse First
Boston, Michael Kwatinetz, Thursday afternoon, who later
put out a voice-mail message to clients saying January was
looking weaker than expected. And PaineWebber analyst
Don Young put out a note on Friday, after receiving a return
call from the company Thursday night, lowering his estimates
and downgrading the stock.
A Compaq spokesman said the company's chief financial
officer commented on computer demand during the tour with
investors only in response to a question from an investor about
weakness in demand during the quarter. "We were agreeing
with a comment made by an investor," a spokesman said. "At
the time of the conversation, we did not believe that this was
material [information]"
It was a big deal to investors. The news rocked Compaq's
shares the next day, sending its stock down 5 5/8 to 35 3/8,
and hit the rest of the technology sector as well, suggesting
that investors viewed the comments as more than an
off-the-cuff remark by Compaq management. Indeed, some
bellwether technology stocks continued to be punished
Monday, with Intel finishing the day down 2 7/8 at 117 1/16
and Compaq losing another 1 27/32 to close at 33 17/32.
Traders say Dell Computer, Micron Electronics and Microsoft
are among the PC makers most vulnerable to further
weakness.
Mr. Kwatinetz didn't return calls for comment. Mr. Young, for
his part, says he is annoyed that he didn't hear about the
demand even earlier. Compaq "didn't answer my calls" before
late last week, Mr. Young fumes. "Next time, I won't call
before downgrading them," he adds.
It all illustrates how uneven the playing field can be for stock
investors. Of course, the little guy can forget about getting the
early call from a broker on something as important as a
slowdown in demand at Compaq. But the uneven flow of
information has become an accepted mode of operation on
Wall Street and even the big players can find they have been
cut out of the loop when an analyst gets a piece of important
information.
Securities and Exchange Commission Chairman Arthur Levitt
has voiced concerns in the past about a rise in trading on
information parceled out by companies to its favorite Wall
Street analysts. In an interview on the subject last year, Mr.
Levitt said he was concerned about the period "after the
analysts know the news, but before the public knows it --
there is a great deal of unusual trading."
Spencer Barasch, enforcement director in the Securities and
Exchange Commission's Fort Worth, Texas, office, said he
was unaware of the Compaq situation, "but generally
speaking, if there's any question to materiality of information
the prudent thing would be to issue a press release so all the
market is on even ground."
Nothing could be more paramount for Compaq, not to
mention the rest of the technology group, than the view on PC
demand. Such data can be about as hard to nail as jelly to a
wall, but nonetheless seems to fluctuate every couple of
months, sending technology stocks flying in one direction or
another. Most recently, investors were cheered in January by
stronger-than-expected demand during the fourth quarter.
During the summer, investors were expecting a disastrous
fourth quarter, due partly to weakness in Asia and Europe.
When that didn't materialize, however, investors grew hopeful
about the first half, especially after the first part of January
seemed strong, leaving some investors to conclude that some
companies were pushing spending on technology related to
year-2000 compliance issues into the first half.
Now, however, a couple of trends seem to be converging,
analysts say, that appear to be cutting away at the "barbell
strategy" Wall Street has hoped computer makers would pull
off. That's when falling margins on briskly selling consumer
products are balanced by higher-margin, if slower-selling,
computer sales to businesses.
Lately, the strategy hasn't exactly been working, some analysts
say. For starters, margins at computer makers are being
pinched by robust sales of sub-$1,000 computers.
Meanwhile, if Compaq is any indication, sales in the small-
and medium-size business segments were soft in January, a
development some analysts say is the result of business
deferring purchases for the entire year because of Y2K issues.
Gross margins on consumer business is about 10%, compared
with 30% on high-end PC-server business.
"For the barbell strategy to work, you need both ends to
come through," says Jonathan Joseph, an analyst at
Montgomery Securities.
Ryan A. Brock, an analyst at market researcher Access
Media International Inc., which specializes in small-business
PC purchasing, says "PC penetration is reaching saturation
among small businesses." The result: The major PC suppliers
increasingly are emphasizing selling service and add-ons. For
instance, Compaq and Gateway recently have formed new
online businesses to sell peripherals, software and other
add-ons.
"A lot of the infrastructure is in place now so it's important to
provide services," says Mr. Brock.
Adding new fuel to Compaq's warning of a slowing, PC
maker Micron said Monday it expects to report
lower-than-expected results for the fiscal quarter ending
Thursday. The Nampa, Idaho, company blamed
lower-than-expected government business, pricing pressures
and buyers putting off purchases in anticipation of new
offerings. It said revenue would be 6% to 9% below, and
gross margins would be 1% below, the results of its last
quarter.
Not everyone agrees there is a problem with demand. PC
Data Inc., for instance, reports that personal-computer unit
sales in U.S. stores rose 22% in January from the same month
a year ago. Officials of PC Data, a market-research firm in
Reston, Va., add that anecdotal reports indicate sales
continued to be brisk in February. "Nothing looks particularly
bad," says Steve Baker, a senior hardware analyst at PC
Data.
Analysts at another research firm, Dataquest Inc., also report
no unusual slowdowns in demand anywhere in the world.
Officials at Dataquest, the San Jose, Calif., unit of Gartner
Group, say they expect world-wide unit shipments of PCs to
increase by an annual rate of 14% this year. That forecast
represents a mild slowdown from 1998, when the shipments
increased 15.5%, according to Dataquest. Dataquest analysts
say they expect the slowdown to occur in the second half, due
to such factors as corporations' wishing to defer purchases
until after the uncertainties of the coming Y2K change are
resolved.
But PaineWebber's Mr. Young argues that the sales
slowdown has been "pretty abrupt and pretty solid." He
pointed to poorer-than-expected PC results at
Hewlett-Packard and Dell, whose quarters closed at the end
of January, as evidence of the sudden onset.
"If it was a January [ended] quarter, it was worse than the
companies with a December [ended] quarter," says Mr.
Young. "Dell specifically said it missed its plan in January. It
was looking for a big month in January and didn't get it."
--Jim Carlton in San Francisco contributed to this article.
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