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Compaq's Pfeiffer Says Shortfall Due to Industry Conditions
Houston, April 11 (Bloomberg) -- Compaq Computer Corp. Chief Executive Eckhard Pfeiffer said the No. 1 personal computer maker's warning of lower earnings is a reflection of industry conditions and not an indication of larger problems for Compaq.
Compaq said late Friday that first-quarter profit will be about half analysts' forecasts because of plummeting prices and weak PC demand. Compaq expects earnings of about 15 cents a share, lower than the 31 cents expected. Sales will be $9.4 billion, less than expectations of as much as $9.98 billion when the quarter began.
Pfeiffer's comments come as the Houston-based company seeks to reassure investors who have been concerned about slowing sales since Chief Financial Officer Earl Mason first warned of it in late February. With other PC-related companies including Intel Corp. and Dell Computer Corp. saying that demand is healthy --and not warning of a profit shortfall -- some said Compaq's problems are its own doing.
''The market is not too hot, but it's not a disaster as Compaq would like us to believe,'' said analyst Ashok Kumar of US Bancorp Piper Jaffrey, who rates Compaq ''buy.'' ''They try to take their execution issues and paint the whole industry with the same brush.''
Haves and Have-Nots
The big problem, analysts said, is that Compaq hasn't been able to successfully move to a model that lets it sell PCs direct to users, which is crucial when prices are falling and demand is weak. Dell, Gateway 2000 Inc. and others are able to react more quickly to cut prices, pass along cost savings and not see a big profit cut because they don't have inventory to work through.
''I don't see an industrywide demand problem -- I see the haves and the have-nots and Compaq is a have-not right now,'' said analyst Lou Mazzucchelli of Gerard Klauer Mattison & Co., who rates Compaq ''hold.''
Still, Pfeiffer insisted that Compaq's problem is not unique and the lower-than-expected sales and earnings are a result of lower PC demand and price slashing throughout the industry.
''Our sales were five percent lower (than forecasts), which is what happens if demand is not as strong and you take pricing down,'' Pfeiffer said in an interview today. ''Clearly, we missed the sales target, but it does not affect how we are going forward.''
In the year-ago first quarter, Compaq issued a similar warning, saying that it would break-even while analysts were expecting profit of 35 cents a share. The company reported net income of $16 million, or 1 cent a share.
Digital Equipment
Pfeiffer also said the integration of the Digital Equipment Corp. business, which was acquired for $9 billion in June 1998, is going according to plan and that the company is on target for planned cost reductions.
''The synergies we saw coming have started to happen and will continue to grow,'' Pfeiffer said. ''We are very positive looking forward.''
There had been concern that perhaps the Digital businesses, particularly high-end servers and workstations, weren't doing as well as expected, analysts and investors said.
Dell, the No. 1 direct-seller of PCs, has said repeatedly that it's optimistic about 15 percent unit shipment growth for PCs this year and that it sees healthy demand. That led some to say that Compaq's woes are its own because it was late to the party in selling direct to users.
Pfeiffer, though, said Dell is seeing the same sluggishness that hurt Compaq.
Dell
''Dell already missed the quarter that ends in January, and that in itself is a sign of lower demand,'' Pfeiffer said. ''If somebody is doing propaganda and saying we are not seeing this -- well, it remains to be seen.''
Indeed, Dell shares fell 8 percent the day after it reported sales rose a less-than-expected 38 percent for the quarter ended Jan. 29, its weakest in two years. Since then, however, Dell has said the PC market is ''healthy,'' and it has seen nothing abnormal in the quarter. Dell's fiscal first quarter ends April 30.
For years, Compaq has used distributors and dealers to sell its machines. Competition from Dell has forced Compaq to change its strategy and look at selling direct. Selling direct helps cut costs because manufacturers buy parts only when they need them and take advantage of lower prices.
''This just points out Compaq's problem weaning themselves from the channel or fighting a very tough battle with the direct guys,'' Mazzucchelli said.
When Compaq started selling direct last November, there was much concern among resellers, who get cut out in that model. Compaq recently modified its direct program to include some distributors who will help build the machines and ship them to users.
Compaq also is gearing up for its Innovate Forum, which starts tomorrow in Houston. The gathering of major customers is hosted by senior managers and is scheduled to feature speeches from Pfeiffer and Microsoft Corp. Chairman Bill Gates.
Compaq may unveil a new sales strategy at the meeting, analysts said.
Compaq's stock has dropped about 26 percent this year, and is off 40 percent from as high as 50 1/4 in January. Ten Compaq executives, including CFO Mason, sold about $50 million of their shares in February before warning that January sales to small businesses had slowed.
Compaq, which rose 1 5/16 to 30 15/16 before its warning, fell as low as 26 after the announcement.
The company is expected to report earnings on April 21.
Apr/11/ 99 23:33 |
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