From the WSJ:
April 12, 1999
Compaq Profit Warning Raises Questions
About Its Abilities to Compete, Integrate
By GARY MCWILLIAMS
Staff Reporter of THE WALL STREET JOURNAL
Though Compaq Computer Corp. blames weaker-than-expected sales in
saying that first-quarter profit will be less than half of Wall Street's
projections, some analysts are questioning the PC maker's ability to
manage competition while melding operations with Digital Equipment
Corp.
Compaq, which in February warned of slackening demand for its PCs,
said Friday that heightened competition and disappointing sales of its
most-profitable computers will result in net income of about $250 million,
or 15 cents a share, for the quarter, Compaq said.
That is well below the already-lowered
consensus estimate of $560 million, or 32
cents a share, held by Wall Street analysts.
Revenue was projected at $9.4 billion, $100 million to $400 million below
analysts' projections.
The warning, which came after the markets closed, triggered a sell-off of
computer stocks in after-hours trading. Traders reported heavy selling of
Compaq at $26 to $27 a share, which had closed at $30.9375 in New
York Stock Exchange composite trading Friday. Intel Corp. and Dell
Computer Corp. also traded as much as $4 below their closing prices.
Compaq's disclosure shocked many analysts who had come to believe that
the company's income was on track, and several pointed to the integration
of Digital Equipment, which Compaq acquired in June. "The company has
overstated the DEC synergies," said analyst Ashok Kumar of US Bancorp
Piper Jaffray Inc.
"Compaq said there was lower demand; everything we see says different,"
said analyst Charles R. Wolf of Warburg Dillon Read. Indeed, a day
before Compaq's announcement, rival Dell called PC demand healthy,
across all geographic, product and customer segments.
Instead, said Mr. Wolf, "there are two issues here: integrating DEC and
the misguided steps the company took last fall" to sell directly to
businesses. He said he believes Compaq's need to add dealer incentives
for products intended to be sold directly has contributed to margin
declines.
In an interview Sunday evening, Compaq Chief Executive Eckhard Pfeiffer
insisted the profit woes were because of what he described as an about
$600 million shortfall in expected sales during the period.
"Everyone is building expectations on certain market-demand growth. If it
[demand] comes in at a somewhat lower level, the competitive reaction
leads to price cuts that are deeper or more frequent. We had both these
factors in the last quarter," Mr. Pfeiffer said. "This should not be
completely blown out of proportion." He said the company will continue to
look for ways to improve production and delivery, address margin
improvements and complete its absorption of Digital Equipment. Financial
results will be released April 21.
The timing of this latest problem couldn't be worse for Mr. Pfeiffer, who
has been struggling to turn around the Houston PC maker's fortunes for
better than a year. This week, he opens a weeklong customer gathering
designed to showcase Compaq's products and operations. He has invited
about 4,000 executives from its biggest customers, including Ford Motor
Co., Nippon Steel Corp., and Nestle SA, to hear how Compaq products
and service can help them adapt to the changes spurred by the Internet.
Instead, he is apt to face questions over the miscues in his own business
that rivals have used to outmuscle Compaq. "To come out on the ninth of
April and announce you've missed the quarter by 50% represents a huge
credibility problem," said Ciaran T. O'Kelly, managing director of equity
trading at Salomon Smith Barney Inc.
The profit woes suggest sales of big computers acquired through the
acquisitions of Digital Equipment and Tandem Computers continue to fall,
analysts say. Sales of the high-priced machines, which carry gross margins
at least double that of PCs, aren't salvaging the PC margins drop.
Compaq's product gross margin is expected to be about 22.5% for the
quarter, similar to Dell and Gateway Inc., which don't offer minicomputers.
Analysts say the shortfall is likely to expand the cutbacks now under way
and force a re-evaluation of its direct-sales efforts. "Compaq claimed all
along it wouldn't be structurally disadvantaged once DEC got absorbed.
Now we may see them challenging that assumption," says Louis J.
Mazzucchelli Jr., analyst at Gerard Klauer Mattison.
In its statement, the company said it "will continue its aggressive drive" to
cut costs and operating expenses "in the face of a very competitive
market."
Compaq's juggling of sales through dealers and through its own telephone
and Internet-sales operation also could come under new scrutiny. Two
weeks ago, Compaq disclosed it would make its five-month-old Prosignia
PC line, designed for direct sales via the Internet and telephone, available
through retail stores. The move only complicated the company's
distribution, critics say. "If you want to make sure you're getting the best
Compaq price, you have to shop four [sales] channels," Mr. Mazzucchelli
says.
A year ago, Compaq similarly warned of below-par sales during the first
quarter. It had operating losses during the first half of the year as the
company was forced to provide sales incentives on as much as $500
million in excess dealer inventories.
This time, dealer inventories aren't anywhere near as high. Analyst Don
Young of PaineWebber Inc. estimates resellers hold four weeks of sales
on their shelves, compared with 12 weeks a year ago. However, the timing
and size of Compaq's profit miss suggests the company was required to
make significant price concessions on those inventories, Mr. Young said.
He believes the impact of selling even a small amount of discounted PCs
could ripple across the industry. He said if demand doesn't accelerate by
midyear, price competition will worsen as companies try to hold on to their
market share.
|
