07:27 DJS Compaq Profit Warning Raises Doubts About Its Ability To Compete
07:27 DJS Compaq Profit Warning Raises Doubts About Its Ability To Compete
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. 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.
Copyright (c) 1999 Dow Jones & Company, Inc.
All Rights Reserved.
(:CPQ)
04/12 7:27a CDT
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