Compaq cuts outlook, takes $500 m charge

Caroline Humer and Peter Henderson

NEW YORK: Compaq Computer Corp. said on Monday it expects to report a

third-quarter operating loss and lower-than-expected sales, as the No. 2

personal computer maker cited everything from a typhoon to the Sept. 11 air

attacks for its expected shortfall.

The Houston, Texas-based company said it was hurt by the Sept. 11 attacks, as

well as a typhoon that hit key suppliers in Taiwan.

Also in September, the company announced plans to merge with competitor

Hewlett-Packard Co. last month, which in itself caused both customers and

employees to pause, chief financial officer Jeff Clarke said in a conference

call.

"The challenges resulting from the above events were further underscored

by the fact that they occurred in the last month of the quarter, during which we

typically ship up to 50 per cent of the quarter's revenue," he said.

The company also said it would take a charge of $500 million related to its

investment in Internet holding company CMGI Inc. Compaq said it expects revenue

of $7.4 billion to $7.5 billion and an operating loss of 5 cents to 7 cents a

share.

Compaq chief executive Michael Capellas likened the quarter to "the

perfect storm."

"Obviously, we had overall weakness in the economy and truly brutal

pricing, which was affecting the supply-and-demand side, but there was just an

unbelievable effect in terms of lost productivity and almost chaos in the

transportation system," Capellas said during a conference call.

And for the fourth quarter, Capellas didn't offer much more hope.

"Visibility is particularly tough as we look forward," he said.

Analysts said that the company's shift to direct sales may have exacerbated

the situation. Compaq has long been working to reduce the amount of inventory

that sits with distributors and retailers. In this case, that may have made the

supply chain disruption more important.

"They have been moving toward just-in-time style of production, so I'm

sure that led to the shortfall," Eric Rothdeutsch, an analyst at Robertson

Stephens said, referring to a more direct sales model at Compaq.

Analysts had expected revenues of $8.2 billion in the third quarter,

according to Thomson Financial/First Call, after the company told them in July

to expect revenues in a range of $8 billion to $8.4 billion. Analysts had also

expected the company to post earnings of 5 cents a share in the quarter.

Compaq, struggling with an aggressive price war started by competitor Dell

Computer Corp. , agreed to be bought by HP on Sept. 4 in a deal that has met

with much skepticism on Wall Street. Since the deal was announced, its value

fell from $25 billion to less than $17 billion.

(C) Reuters Limited 2001.