Compaq’s outlook pessimistic after lower Q2

Peter Henderson

SAN FRANCISCO: Compaq Computer Corp. on Wednesday posted sharply lower

second-quarter profits and sales, and said revenue would continue to slide in

the coming months as a worldwide slump spread.

"It's an understatement to say that we're in the midst of an extremely

challenging global market," Michael Capellas, chairman and chief executive

officer, told a conference call.

Executives pointed to signs of US corporate stability but said consumers were

skittish and Asian growth would deteriorate, following US and European weakness.

The No. 2 maker of personal computers, aiming for a future in services, forecast

that operating earnings per share would roughly double in the third quarter from

the current period, but could lag current Wall Street's consensus target.

Second-quarter pro forma net earnings, which exclude one-time charges, fell

to $67 million, or 4 cents per diluted share, from 21 cents per share in the

period a year ago. Sales fell to $8.45 billion in the quarter ended June 30 from

$10.14 billion in the same quarter a year earlier.

"If you look at the one thing that sticks out like a sore thumb as the

reason for the revenue declines and such, it is the dramatic decline in the

consumer market, not just in North America, but on a worldwide basis,"

Executive Vice President Mike Winkler told Reuters in an interview.

Shares of Compaq, which have underperformed those of global PC leader Dell

Computer Corp. by around 70 percent this year, were steady in after hours trade

around the $14.12 level at which they closed on the New York Stock Exchange.

"We're kind of on the fence right now," said Harshal Shah, a

portfolio manager at Fremont Investment Advisors. "More than anything, the

valuation is just attractive. Pretty much it seems as if most of the negative

news is out."

He said Compaq now had to prove it could improve, primarily in its services

sector, the linchpin of a company-restructuring plan. "Compaq now is kind

of a show me story," he said. Asian growth would slow and Europe and North

America would be roughly stable, as if nearing the bottom of a bowl, Winkler

told Reuters.

"What you are probably seeing is that Europe is probably at the bottom

of the soup plate as North America is."

"We have certainly, we believe, seen the bottom in the commercial side

and have some inklings of the beginnings of an upturn," in North America,

he said. Some companies were beginning to restart technology projects shut down

during the economic slump, and others were looking to trim costs by turning to

Compaq's services unit, he said.

But Capellas was even more cautious, also pointing to Latin American

weakness.

"Before anybody draws the wrong conclusion, you're not seeing me say

that you're seeing a huge pick-up. What we are seeing is stabilization in the

key markets, and we are seeing a little more activity with the commercial

accounts. Retail side is still pretty tough," he told the conference call.

Winkler said the company had hopes that the new Microsoft Corp Windows XP

operating system and back-to-school season would nudge consumers to buy and that

that division could be profitable in the fiscal fourth quarter.

Analyst were nervous about spreading instability. "Europe and Asia

Pacific were the engines of what growth and stability there was," said Wit

SoundView's Mark Specker. "To see them slowdown is a bit frightening."

"The deterioration in Europe and international markets is much worse

than I thought," said Bernstein's Vadim Zlotnikov.

Restructuring



Compaq has staked its future on its ability to cut costs and improve services.
It would cut inventory held by it and resellers by $300 million this quarter and

shed more employees to meet the 8,500 job cut goal for the year, executives

said.

"The permanent improvements we are making in our business model are

having a positive impact now," Capellas said in a statement.

Including a $493 million restructuring charge, Compaq posted a net loss of

$279 million, or 17 cents per diluted share in the second quarter, compared to a

profit of $388 million, or 22 cents per diluted share a year earlier.

Third-quarter sales will dip to $8.0 billion to $8.4 billion, bringing

earnings per share of 7-9 cents, Compaq forecast. Wall Street analysts polled by

research firm Thomson Financial/First Call had expected earnings of 4-15 cents

for the third quarter, with a consensus of 9 cents.

"The services business does seem to be the bright spot," said

Zlotnikov. But, he said, "This will be the first year in close to 40 years

you'll see a decline year over year in capital spending or sales of

technology," referring to the dawn of the computer age.

(C) Reuters Limited 2001.