"Compaq did not reap one of the few benefits from the Asian crisis -- lower component costs. Mason said Compaq was living with long-term contracts with its suppliers that expired in the fourth quarter. Those contracts were struck at a time when component costs were higher.
"We're only now starting to see some of the benefits of those lower costs," Mason said. "
8:09 PM 1/21/1998
Compaq closing in on $50 billion target
By DWIGHT SILVERMAN
Copyright 1998 Houston Chronicle
Compaq Computer Corp. once again reported strong quarterly and annual earnings Wednesday and is now almost halfway to its goal of becoming a $50 billion company by the turn of the century.
Earl Mason, Compaq's chief financial officer, said while the company could meet its goal in two years by growth alone, it was likely Compaq would make another big acquisition, such as its purchase of Tandem Computer last year.
"We believe we can get there without an acquisition, but you'll notice that we increased our cash assets to $6.4 billion," Mason said. "The likelihood of us doing another acquisition is high."
The strong earnings report came despite a shrinking market for personal computers in Asia, which is suffering a regional fiscal crisis. One analyst said the consumer market for PCs has virtually "evaporated" in Japan, but Houston-based Compaq derives only a tiny portion of its revenues from that region.
Compaq reported sales for the quarter ending Dec. 31 of $7.3 billion, a 23 percent jump over the same quarter in 1996, when the company had nearly $6 billion in sales. Profits for the quarter were $667 million, or 84 cents a share, a 37 percent increase over last year's $487 million, or 63 cents a share.
For the year, Compaq had sales of $24.6 billion, a 23 percent increase over 1996's $20 billion. Annual profits for 1997 were $1.9 billion, or $2.37 a share, compared to $1.3 billion, or $1.74 a share, in 1996.
The 1997 profits include a $252 million nonrecurring charge for acquisitions and the purchase of developing technology.
Investors liked the news. Compaq's stock -- which began its first trading day under a previously announced 2-for-1 split -- closed at 32, up 2.
Ashok Kumar of Austin-based Loewenbaum & Co. said he didn't believe Compaq could reach its $50 billion goal by 2000 without making a big acquisition that would add to its revenues.
"Mathematically, it's impossible," Kumar said.
But William Conroy, an analyst in Houston with Williams Mackay Jordan & Co., said Compaq could get "within spitting distance" of $50 billion without buying another company based on its current growth.
Mason said 37 percent of Compaq's sales were to businesses that bought its high-end servers and workstations. Those products have higher profits on each unit sold, and increasing that category helped boost Compaq's quarterly profit margins -- the percentage of revenues after expenses are subtracted -- to 27.6 percent, compared to 24.4 a year ago.
And big purchases from big businesses are expected to increase. Mason said that, in the fourth quarter, Compaq began to see sales to companies that have decided to buy whole new systems as a way of fixing the fabled year 2000 problem -- when older computer systems can't handle dates with "00" in them.
Mason said Compaq's sales in most of the world were strong -- with increases of 52 percent in North America and Europe -- but its markets in the Far East actually shrank. Japan, for example, was down by 16 percent.
He said Compaq did not reap one of the few benefits from the Asian crisis -- lower component costs. Mason said Compaq was living with long-term contracts with its suppliers that expired in the fourth quarter. Those contracts were struck at a time when component costs were higher.
"We're only now starting to see some of the benefits of those lower costs," Mason said.
Consumers are also seeing the benefits. Compaq and other companies dramatically cut prices on their systems after the first of the year. A computer that once sold for $2,000 at the start of the fourth quarter of 1997 now sells for about half that.
Mason said that, so far, Compaq has not suffered a cannibalizing of its higher-priced consumer machines -- which carry higher profits -- as customers have opted instead for the cheaper machines.
"Those are two different kinds of buyers," Mason said.
Analyst Conroy said Compaq has done an excellent job of trimming its costs, with its build-to-order systems being adopted in more factories and across its entire product line. Under this system, computers are not assembled until an order is in hand.
As a result, Compaq has been steadily cutting prices and grabbing market share as it gets a better handle on its costs. But other companies are also doing the same thing, Conroy said.
"I don't think what we have is a price war, so much as a cost war," he said.
Loewenbaum's Kumar said businesses are starting to demand the same lower-cost systems that consumers are enjoying, a factor that Compaq is going to have to deal with in the near future.
"While the impact of the $1,000 PC has been felt primarily in the consumer space, the momentum is building up on the commercial side as well for under-$1,000 machines," Kumar said.
Overall, Compaq's good numbers hint that other PC makers had a good year and quarter as well, he said.
Indeed, Compaq's good news Wednesday helped bolster other PC-related stocks on a day when IBM's sluggish earnings hurt technology stocks overall. Austin-based Dell Computer and Intel Corp. were both up. But Hewlett-Packard, which sells to many of the same customers as IBM, was down. |
