Compaq Takes a Hit

Last Thursday, Compaq announced a second quarter loss of $184 million, or about 11 cents a share, a little less than many analysts had expected. However, Compaq’s new president and CEO, Michael Capellas, unexpectedly announced that Compaq will take a $700 to $900 million charge against earnings in the third quarter, bringing the overall loss to about $1 billion. Compaq will move to eliminate 6000 to 8000 jobs in its 70,000-person workforce, although the company declined to say which facilities and programs will close. The company pledged to be profitable again in the first quarter 2000, 6 months from now.The company’s earnings grew by 17 percent over the quarter to $9.4 billion, but a decline in profit margins caused by lower PC prices and an increase in operating expenses contributed to the loss. Compaq cited several factors that contributed to the loss, including warranty expenses, costs associated with terminated programs, and penalties accumulated in long-term purchasing contracts. Compaq’s gross margin fell considerably from 24.7 percent in the first quarter to 20.5 percent in the second quarter, while operating expenses increased from $1.9 billion to $2.2 billion over the same period.Despite the bad news, Compaq pointed to some good news and some interesting results. Compaq noted that sales of its enterprise server line increased by 46 percent over last year, sales of its enterprise storage line are up 30 percent over last year, and its overall enterprise business is up 11 percent over last year. Despite these advances, Compaq made no mention of its Alpha line, which is rumored to be struggling--not the impression Compaq wants to portray.Compaq’s PC business continues to be strong. During the second quarter, Compaq shipped 3.7 million PCs (a 16.6 percent market share), 1 million more units than Dell. However, the company continues to lose market share to Dell in this area. PC growth was up 63 percent over last year, with 35 percent up in revenue; however, the unit cost of a PC dropped by 23 percent.Capellas said that Digital Equipment will lay off 1800 employees, completing the 17,000 layoffs the company began before Compaq acquired Digital. Services, the reason that Compaq bought Digital, grew only 6 percent during this period, and John Rando, who use to head that division, has recently left. US services were up by 32 percent, but worldwide services were flat in Europe and down in Asia.