Compaq Computer Corp said on Monday that its first-quarter profit fell 21 percent, hurt by a slump in sales of home personal computers and powerful servers. The biggest PC maker will fire 2,000 more people, bringing the cuts announced this year to 7,000, or 10 percent of the workforce.
The company's shares slid as much as 5.6 percent. On a call to discuss first-quarter profit, Compaq Chief Executive Michael Capellas forecast second-quarter earnings of US$0.05 a share, less than the US$0.17 average analyst estimate in a poll by First Call/Thomson Financial.
``For others on Wall Street with much higher estimates, it's a big shock,'' said Daniel Niles, an analyst with Lehman Brothers who was projecting US$0.12 a share for the second quarter. ``It's not normal to cut your estimate by more than half.''
Compaq's sales of servers, the powerful computers that run Web sites and corporate networks, are slipping as customers trim spending, especially in the telecommunications industry. The company is trying to reduce expenses to preserve profit as demand stagnates and it's forced to cut PC prices to keep up with arch-rival Dell Computer Corp, which is stealing market share.
``The question is, when will things get better?'' said Eric Rothdeutsch, an analyst with Robertson Stephens, who rates the stock a ``buy.'' The current environment ``does favor a company like Dell, which has five days of inventory.''
Compaq's shares fell as low as US$19.50 on Monday after the report. They had declined US$0.86, or 4 percent, to US$20.65 in regular trading before the release. The stock has risen 37 percent this year.
Niles said he'll maintain a ``buy'' rating on Compaq because it is trading near its five-year low and isn't over-valued as are other technology companies. He said Compaq's announcement could affect Intel Corp, which supplies chips to Compaq and other PC makers.
``Intel said that March was the bottom. Compaq said they haven't seen the bottom,'' said Niles. ``I think we'll cut our numbers on Intel going forward.''
First-quarter profit from operations fell to US$200 million, or US$0.12 a share, from US$252 million, or US$0.14, a year earlier.
Sales fell 3.2 percent to US$9.2 billion from US$9.51 billion.
The Houston-based company was forecast to earn US$0.13 a share on sales of US$9.14 billion in the recent quarter, the average estimates of analysts polled by First Call.
In the March period, Dell overtook Compaq in worldwide market share for the first time, market researcher Gartner Dataquest said last week. Compaq's unit shipments rose 0.3 percent from a year earlier, compared with Dell's growth of 34.3 percent. Dell garnered 12.8 percent of the worldwide PC market for the quarter, while Compaq's share was 12.1 percent.
Dell keeps inventory low and can cut prices faster by selling directly to customers. As parts prices fall, Dell can pass lower costs on more quickly because it builds PCs as orders come in over the Internet and telephone.
``Compaq said it wouldn't respond to Dell's pricing and you saw the results,'' said Ashok Kumar, an analyst with US Bancorp Piper Jaffray. ``Now basically the wind is behind Dell's back.''
In the first quarter, sales of consumer and commercial PCs declined 7 percent to US$4.37 billion, Compaq said. Revenue from servers and storage fell 2 percent to US$2.9 billion, while services revenue increased 3.9 percent to US$1.94 billion.
Sales in North America declined 17 percent. Japan sales posted the strongest growth at 31 percent, while Asia Pacific revenue climbed 29 percent, Latin American sales rose 17 percent, and revenue from China increased 6 percent.
The second quarter is traditionally a weak quarter for sales, Rothdeutsch said, and PC makers probably will see their sales pick up in the second half beginning with back-to-school purchases.
``These stocks have bottomed out,'' said Rothdeutsch.
Compaq's efforts to reduce inventory and employees should make it a stronger company when the economy recovers, he said.
Dell taking market share in PCs is becoming irrelevant, said Peter Blackmore, Compaq's executive VP of worldwide sales and services, in an interview. He said Compaq generates 53 percent of its revenue from servers and storage devices and services.
``This market is changing very rapidly,'' Blackmore said. ``Compaq has a very large business that is not in personal computers.''
In March, Compaq said it would fire 5,000 workers as it weathered a slowdown in sales caused by cooling economic growth.
As of Dec. 31, Compaq had 70,100 employees.
``We had a reasonably good quarter, but we will continue to make the tough decisions,'' CEO Capellas said on a conference call.
``This makes us nothing but competitive.''
The company will reduce its inventory level by US$450 million, which will help profit growth pick up in the second half, said Capellas.
In last year's second quarter, Compaq had profit from operations of US$362 million, or US$0.21 a share, on sales of US$10.13 billion.
Capellas also said profit will improve as the company starts to benefit from its restructuring. Compaq also is becoming more aggressive in competing against Dell by lowering prices, he said.
Including a charge for restructuring and an investment gain, the company had net income of US$78 million, or US$0.05 a share, in the recent period.
A year earlier, a gain of US$44 million made net income US$296 million, or US$0.17 a share.
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