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To: David Weis who wrote (35006)	3/20/1998 10:24:00 AM
From: Gabriel008	Read Replies (1) \| Respond to of 176387

FYI ALL: Article from Channel Reseller News. Copied sans permission below. N.B. [note bene] - some analysts are pegging CPQ's excess PC inventory at $2.0 to $2.5 billion - a full month of product liquidate. Executive Briefing By Robert C. DeMarzo Editor-in-Chief, VARBusiness -------------------------------------------------------------------------------- Thursday, March 19, 1998 Dear Gabriel, I answer the phone wondering if someone has died. The caller, a representative from Compaq's public relations department, sounds grim as he delivers stunning news: Compaq expects to break even in the first quarter and sales will be flat compared with a year ago. No doubt a major reversal of fortune deserving of the moribund tone of the caller. But Compaq chief executive Eckhard Pfeiffer knows a thing or two about damage control, so he sends out a message after the market closes on Friday, March 6. This way, analysts and investors have the weekend to sleep on the news, perhaps softening the impending sell-off that follows all bad news. From an investment standpoint, things could have been worse. By close on the first day of trading following the news, Compaq lost 8 percent of its value, dragging down a wide range of high-tech blue chip companies. Everyone scrambled to point fingers and assess the dire situation: Price-cutting's to blame. Compaq's late to channel assembly. Its servers are being undercut from IBM and others that are making an all-out assault on Compaq's fortress of profits. Those were among the leading reasons why Compaq stumbled so hard in the first quarter. Everyone agrees that inventory levels on Compaq, and perhaps other vendors' lines, are too high, and it is going to take time for the channel to work down its stockpile of servers and desktops. Some analysts are forecasting Compaq has $2 billion to $2.5 billion worth of inventory to work off, a full month's worth of product to flush out of the channel. That is the reason why Compaq must shift gears more quickly to take advantage of the efficiencies associated with channel assembly, or what Compaq calls its Optimized Distribution Model. The goal here for Compaq is to move from inventory levels of eight to 10 weeks down to one that functions with three to four weeks worth of inventory. Although it is a bit harder to pin down, it seems that sales to large, medium and small businesses are holding up well. If anything, some major corporations might be taking a breather, but offsetting that is strong demand from small and midsize businesses. The bottom line is that in Q1 of 1997, Compaq reported a 42 percent surge in sales to $4.2 billion, producing net income of $234 million. The first quarter of 1998 is not going to match those results. This translates into a tough second quarter with the promise of a bloody price war as the No. 1 PC maker, blindsided by a left hook, attempts to get off the canvas. Compaq rebounds well to the detriment of its rivals. Remember, just two days prior to Compaq's stunner was a jolt from Intel, which lowered its first quarter revenue and profit expectations because of weakening PC demand. And, of course, now we know who was causing some of Intel's problems. Intel's stock got whacked harder than Compaq's, losing more than $11 a share as it grappled with weakness across the board. Intel said orders from large PC vendors were down, but it could not pinpoint the reasons behind the slack in demand. Some of the fundamentals may be changing for Intel as vendors move to build-to-order and channel assembly models. As IBM, Compaq and Hewlett-Packard operate more efficiently, they will change the way they order products not only from Intel but also from other component suppliers such as Seagate and Western Digital. So that leaves us all wondering if we should brace for an overall industry slowdown, or if this is one of those stalls brought on by an overabundance of inventory in the channel. If both Intel and Compaq are hurting right now, you could conclude that we are in the early stages of a minor slowdown. Supporting slowdown theorists is evidence from one leading networking distributor citing weakness with second-tier networking vendors. Although the distributor notes that sales of market leader Cisco remain strong, he is worried about a slowdown. Still, Compaq chief financial officer Earl Mason said he does not think there is a general slowdown in PC sales in North America. Mason's presage may be more hope than actual knowledge here. Weathering the next few months will not be easy for Compaq, which is under attack from IBM and HP, while--lest we forget--attempting to finalize a $9 billion buyout of Digital. Mason believes ODM--can't think of a worse acronym--will help flatten out its channel-sales model, so it avoids heavy sell-ins toward the end of the quarter or prior to product transitions as the server business is experiencing with Slot II machines in the next few weeks. Let's hope he is right for Compaq's sake.