Compaq reports Q3 operating loss as PC sales fall

Caroline Humer

NEW YORK: Compaq Computer Corp. on Tuesday reported a third-quarter operating

loss due to weak technology spending, aggressive pricing, and shipping problems

related to the Sept. 11 air attacks.

The No. 2 manufacturer of personal computers also said that it expects the

fourth quarter to be weak as a nearly year-long PC price war outweighs expected

strength in computer services. It does see the fourth quarter improving from the

third quarter, however, as consumer demand increases a bit. It expects an

operating loss of about three cents a share and revenue to be in a range of $7.6

billion to $7.8 billion.

Compaq announced plans to merge with competitor Hewlett-Packard Co. in

September. Analysts had expected Compaq to break even in the fourth-quarter,

with estimates from 19 analysts ranging from a loss of seven cents a share to

earnings of nine cents a share, according to Thomson Financial/First Call.

For the third quarter, Compaq said it had a loss of $120 million, or seven

cents a share, on an operating basis, in line with Wall Street estimates. That

compares to operating earnings of $532 million, or 30 cents a share, in the

year-ago period, the company said.

"Weak economic conditions, aggressive pricing, logistical issues around

the events of September, and channel inventory reductions contributed to the

revenue decline," Compaq Chief Financial Officer Jeff Clarke said during a

conference call.

Compaq has ceded market share this quarter to competitor Dell Computer Corp.,

which has used aggressive pricing to grow in both the corporate and consumer

markets this year.

Market research firm Gartner Dataquest said recently that Compaq's market

share slipped to 10.4 per cent in the third quarter from 13.4 per cent in the

year-ago quarter. Dell's share, meanwhile, rose to 13.8 per cent from 11 per

cent. A.G. Edwards analyst Brett Miller said that the company seems to be

letting the PC market go in favor of the storage and server markets, where

margins are typically higher.

"You just don't get the bang for the buck on the desktop or the

notebook, or PDAs," Miller said. The Houston, Texas-based company said that

on a net basis, it lost $499 million, or 29 cents a share in third quarter,

compared with earnings of $557 million, or 31 cents a share, in the year-earlier

period.

The company's third-quarter 2001 operating results exclude an investment loss

of $514 million, primarily related to Compaq's investment in CMGI Inc. After

Compaq pre-announced on Oct. 1 that it expected to post a loss in a range of 5

cents to 7 cents a share, analysts expected a 6 cent per share loss, according

to First Call.

Compaq said that sales fell to $7.5 billion in the quarter, down from $11.2

billion in the year-ago period. In addition, Compaq's gross margins as a

percentage of revenue fell to 19.9 per cent, a 4.1 percentage point decline from

a year-ago.

The company said that inventory at distributors fell by $600 million during

the quarter and that it cut expenses by $100 million. But it wasn't enough,

analysts said.

"They've been wringing inventories out of their channel. They've been

achieving greater efficiencies in their factories, but the market is hurting

them because volumes are declining, pricing is declining and so the fixed

overhead of the company is really coming to bear now that revenues have dropped

so much," Robertson Stephens analyst Eric Rothdeutch said.

Before announcing its third-quarter results, Compaq shares closed down 25

cents, or 2.6 per cent, at $9.40 on the New York Stock Exchange. Compaq shares

have fallen 37 per cent in 2001, while the American Stock Exchange Hardware

Index declined 60 per cent during that period.

(C) Reuters Limited.