Compaq Computer Corp, which this year lost its position as the top personal-computer maker, said its second-quarter profit fell 81 percent as sales slumped and the company cut prices to keep up with Dell Computer Corp. Compaq said third-quarter revenue will miss forecasts.
Profit from operations fell to US$67 million, or US$0.04 a share, from US$362 million, or US$0.21, a year earlier, Compaq said.
Sales dropped 17 percent to US$8.45 billion. Third-quarter revenue will decline to US$8 billion to US$8.4 billion, while analysts polled by First Call/Thomson Financial expected US$9.3 billion.
PHOTO: BLOOMBERG
As PC demand drops and profit margins narrow, Compaq has fired thousands of workers and combined units to cut costs and become more efficient.
Chief executive Michael Capellas is reorganizing the company to increase sales of corporate consulting and computer services, a more profitable business that provides a steadier revenue stream than PC sales, which fell 22 percent in the period.
"It doesn't look very good," said Louis Kokernak, senior equity strategist at Martin Capital Advisors, which owns more than 5,000 Compaq shares. "The guidance has been very poor for the tech sector. This looks like more of the same." The company said earnings this quarter will be US$0.07 to US$0.09 a share, compared with analysts' average forecast for profit of US$0.09, according to a poll by First Call.
Profit in the second quarter matched analysts' reduced forecasts.
In last year's third quarter, the company had net income of US$550 million, or US$0.31 a share, on sales of US$11.2 billion.
"It's an understatement to say that we're in the midst of an extremely challenging global market," Capellas said on a conference call.
Capellas said Compaq's restructuring is almost complete, except for consolidation of plants and reduction of some employees in Europe. The company said it has fired 5,100 of the 8,500 workers it said it would eliminate this year. Compaq will make improvements in costs in the third quarter and the full effect will be felt by the fourth quarter, Capellas said.
"We are ahead of our program," he said.
Compaq said inventory management helped generate operating cash flow of US$584 million in the second quarter.
The company reduced its inventory by US$300 million and a further US$400 million at distributors in the quarter. That brings the total inventory reduction to US$1 billion in the first half.
Compaq is planning to cut inventory by US$200 million more at distributors in the second half.
"They're poised to be a significant beneficiary if and when the macro environment is better," said David Katz, chief investment officer of Matrix Asset Advisors Inc, which has 751,000 shares.
Compaq said purchases by major corporate customers in the US are becoming more stable, particularly for Internet infrastructure and wireless-access devices. "We are starting to see major customers launch or continue with their programs," said Capellas.
Revenue declined because of weakness in the US, worsening economic conditions in Europe and reductions of inventory, said chief financial officer Jeff Clarke.
Sales of services, or setting up computer networks and managing systems and software for other corporations, increased 6.8 percent in the second quarter to US$1.94 billion. Global services was Compaq's only division to report higher sales.
"They're trying to be a powerhouse consulting firm," Kokernak said. "Just about every hardware and software maker is trying to do that." Sales at Compaq's PC division, the company's largest revenue generator, fell to US$3.82 billion from US$4.91 billion. The group had an operating loss of US$155 million, compared with operating income of US$44 million a year earlier.
The company has been losing PC market share to Dell, which has said it will keep slashing prices to lure buyers during the slump in demand. Compaq and Gateway Inc have been reducing prices to keep up, hurting profitability.
In the second quarter, Dell garnered 13 percent of the worldwide PC market by unit shipments, compared with Compaq's 11 percent, researcher Dataquest Inc said last week. Dell was the only PC maker whose sales increased during the period.
"Even considering the brutal market conditions, I'm disappointed with our performance in the consumer market, particularly in our retail business," Capellas said.
Sales of servers and storage devices, which have wider profit margins than PCs, fell 21 percent to US$2.7 billion on weaker demand, aggressive competition and reductions of inventory among distributors. Operating income in the division was US$74 million, down from US$383 million in the same period last year.
Including a restructuring charge of US$493 million, Compaq had a loss of US$279 million, or US$0.17 a share, in the recent period. In last year's second quarter, a gain of US$25 million made net income US$388 million, or US$0.22. Sales in the year-ago period were US$10.1 billion.
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