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INTERVIEW-Compaq CEO blames price wars for Q1
miss
Monday April 12, 12:37 am Eastern Time
By Eric Auchard
NEW YORK, April 11 (Reuters) - Weak business computer demand, stepped-up price
competition and a drive to shore up its No. 1 market position led to Compaq Computer Corp.'s
(NYSE:CPQ - news) impending revenue shortfall, its CEO said on Sunday.
In a phone interview, President and Chief Executive Eckhard Pfeiffer elaborated on Compaq's
announcement on Friday that first-quarter revenues would add up to only $9.4 billion, or 6 percent less than the $10 billion Wall
Street forecast.
Compaq said in a statement on Friday that it expected to post a profit of about 15 cents per share, far below the analysts'
consensus estimate of 31 cents a share found in a prior survey by First Call Inc.
Pfeiffer would not comment on how a 6 percent decline in top-line revenues could translate into a 50 percent drop in profits.
Compaq is still calculating how PC price cuts and lower margins will affect Compaq's bottom line, he said.
''When demand is not as strong as expected ... (and) if you intensify some of your pricing ... that in turn does not only have a
margin impact, but a sales impact,'' Pfeiffer said of the trickle down-effect on Compaq's results last quarter.
The profit warning appeared ready to knock the wind out of many computer stocks on Monday, just ahead of the kick-off to the
sector's first quarter reporting season, analysts said.
But a deep sell-off could be averted because Compaq's woes have been one of Wall Street's worst kept secrets -- the company
had let word slip in late February that only a strong March month could offset sales weakness early in the year.
Pfeiffer said brutal competition in the commercial personal computer market had forced Compaq to make deep price cuts on some
computer lines in order to maintain market share, which in turn had dampened profit margins and revenues.
Industry-wide, PC makers have seen their profits squeezed by the explosive demand among consumers for computers priced
below $1,000 and accelerating pressure on Compaq and other PC makers to sell their machines for $500 or less.
Compaq has also been struggling over how to increase sales of PCs directly via the Web to home and business customers instead
of relying largely on networks of sales distributors.
''In order to not lose market share ... it may cost you another point or two and all of a sudden you are below the target,'' Pfeiffer
said, referring to a drop in profit margins as a percentage of revenues.
Many analysts see the issues involved in the company's projected revenue and profit shortfall as specific to Compaq, not industry
concerns: weakness in its commercial PC sales and conflicts stirred up by selling its PCs via the Internet.
Despite the shortfall, Pfeiffer declared: ''Nothing else has changed at the company. We have a lot of momentum.'' He said, for
example, that Compaq is continuing its effort to streamline PC production and distribution.
''I think it is clear that the PC market ... has not been as strong as originally expected,'' Pfeiffer said of the first quarter ended in
March. He withheld comment on specific factors until Compaq reports final results on April 21.
''There (have) been some significant changes ... which all PC suppliers have experienced,'' he said.
Pfeiffer said Compaq was on track in continuing to make ''very aggressive cost reductions'' in the wake of last June's $8.4 billion
acquisition of Digital Equipment Corp., a business computer and services supplier.
''As far as costs go we have met the targets as far as expense reductions,'' Pfeiffer said of his commitments to Wall Street to
achieve cost savings by integrating the two companies and eliminating duplicate operations.
''We have met the targets through the first quarter,'' he said, noting the time it takes to merge thousands of new employees into an
organization and train them properly.
But trouble for the world's No. 1 personal computer maker spells trouble for the industry, because weak PC demand translates
into fewer computer chips, disk drives and software packages sold. Compaq's warning is likely to heighten investor fears of
further price competition, pressing down other PC stocks.
Compaq stock plunged nearly $5 in after hours trading late on Friday to $26, while Intel Corp. (Nasdaq:INTC - news), the
principal supplier of computer chips that form the brains of Compaq PCs, fell more than $4 to $126.25 from a close of $130.81.
Software maker Microsoft Corp. (Nasdaq:MSFT - news) slipped to $92.75 from $94.25. PC rivals Dell (Nasdaq:DELL - news)
fell to $40.125 from a close of $43.54 in Nasdaq activity, while Gateway sunk to $72.50 from its close of $74.69 in composite U.S.
stock market trading.
US Bancorp Piper Jaffray analyst Ashok Kumar, who predicted a Compaq shortfall weeks ago, cautioned against wholesale
selling of technology stocks. ''It's a company specific issue, not an industry one,'' he said.
Still, Kumar counts himself among the Wall Street analysts who, despite Compaq's projected near-term troubles, have argued
recently that Compaq stock under $30 looks very cheap compared to the shares of other computer makers.
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