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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: profile_14 who wrote (92231)	7/23/2001 9:45:18 AM
From: Elwood P. Dowd	Read Replies (3) \| Respond to of 97611

Monday, July 23 Is Compaq up to the makeover challenge? By John Pletz American-Statesman Staff Monday, July 23, 2001 Compaq Computer Corp. is out to rebuild itself -- again. And this time, Chairman and Chief Executive Officer Michael Capellas intends to complete a major makeover in just six months. Among the highlights: Compaq says it will increase its services revenue 40 percent per year, while picking up 3 points of market share in personal computers and low-end servers in the next six months. Never mind that the industry is suffering its worst slump ever. Never mind that Compaq has been trying to rebuild or reorganize for the past several years after buying Digital Equipment Corp. and Tandem Computers Inc. So when the company reports earnings Wednesday, investors and analysts probably won't be focused on earnings, which the company said two weeks ago would meet Wall Street's expectations of 4 cents per share. Instead, everyone will want to know how Compaq will transform itself. Compaq earlier announced a plan to phase out its Alpha processor for high-end Unix servers in favor of Intel's new Itanium chip. Part of the plan included exporting most of its Alpha engineering staff and technology to Intel as well. More recently, the company said it would begin more tightly bundling services, such as installation and maintenance with hardware, to meet the growing desire by customers to let someone else worry about the basic nuts and bolts of technology. Many of the changes have been in the works for a while. But suddenly the company that lived by the credo "everything to Internet" for the past two years has changed its tune. Gone is Compaq's pitch that its in-house, high-end Alpha talent made it a full-service technology company. The new mantra is "service, service, service and more service." That's not exactly new, but it's being repeated in much louder voice. In a June 12 memo to employees, Capellas said Compaq will increase its services business from about 20 percent of total sales to 33 percent during the next three to four years. That's about the same mix enjoyed today by IBM Corp., which has been building a service business for nearly a decade. To get there, by Compaq's own estimates, it would have to increase services revenue 40 percent a year. That's no small feat, which even Capellas acknowledged by writing in the memo, "This is not a typo." But skepticism abounds about Compaq's ability to pull it off. First, Compaq has been promising higher services growth since it bought Digital in 1998. Yet the business grew just 4 percent in the past year. "This is a business that's never grown 40 percent a year, right?" says a puzzled Andrew Neff, an analyst with Bear, Stearns. Peter Blackmore, Compaq's senior vice president overseeing services, recognizes that the company hasn't always delivered on past hopes to increase services. "There's a certain amount of history there that we have to put behind us," he says. "But we're on the right path." David Bailey, who follows Compaq for Gerard Klauer Mattison & Co., also is dubious about the transformation. "It took IBM over five years to build up its services and software, yet Compaq is going to do it in six months and revamp its PC business?" he asked. Compaq plans to pick up 2 or 3 points of market share in the next two quarters, despite having lost 2 points of share in the past two quarters. "They talk about all of the opportunities for the company but completely ignore the difficulty of getting there," Bailey says. Blackmore acknowledges that the six-month target may be overstating the case. "It was a rallying cry to people internally more than a message for people externally," Blackmore said of the now-widely leaked memo that ran eight pages and 3,500 words. "Without putting down a target by which things must be done, it's hard to hold people accountable." But Compaq is deadly serious about increasing services, he says. The company won't do it all with existing resources. It's willing to spend $500 million to acquire service companies. "Hardware is becoming a utility," Blackmore says. "The market has moved from technology pulling services to services pulling technology." For now, the market appears to be taking Compaq's grand plans with a grain of salt. In what's turning out to be a more stubborn slump in computer demand than anyone expected, every computer company has adopted a story line for Wall Street. Dell says it's taking share. Hewlett-Packard says it's focusing more on its core printer business. Gateway is getting back to basics. At IBM, services and software are the way to go. Compaq has settled on a similar theme. "What else can they say?" Neff says of Compaq. "Are you going to tell people, `We're going to be a great PC company'? No one wants to hear that." You may contact John Pletz at jpletz@statesman.com or 445-3601.