Compaq Computer Corp, which is being acquired by rival Hewlett-Packard Co for US$19.4 billion, on Tuesday reported a third-quarter loss, blaming weak demand, a price war and supply interruptions. The personal-computer maker forecast another loss this quarter, sending the shares down as much as 3.2 percent.
The third-quarter loss was US$499 million, or US$0.29 a share, compared with net income of US$557 million, or US$0.31, a year earlier. Sales fell by a third to US$7.48 billion from US$11.2 billion.
Compaq was battered in the recent period by what Chief Executive Officer Michael Capellas has called "almost the perfect storm." Typhoon Nari in Taiwan hampered production, while a price war and the slowing global economy hurt sales. The Sept. 11 terrorist attacks made the slump worse. Capellas today said holiday buying and Microsoft Corp's new Windows XP software will cause only a "modest" fourth-quarter sales increase from the prior period.
"Our expectation was there wasn't going to be a lot of good news, and unhappily, they lived up to that," said David Katz, chief investment officer at Matrix Asset Advisors, which owns 779,000 shares. "Their guidance, while lower, was not unexpected." Compaq shares dropped as low as US$9.10 following the report, after falling US$0.25 to US$9.40 in regular trading before the earnings release. The stock has declined 66 percent in the past year.
The company said it will have a fourth-quarter loss, excluding certain expenses, of US$0.03 a share on sales of US$7.6 billion to US$7.8 billion. Analysts on average had expected Compaq to break even on sales of US$8.2 billion, according to Thomson Financial/First Call surveys.
In last year's fourth quarter, the company had a loss of US$672 million, or US$0.39 a share, on sales of US$11.5 billion. In that period, earnings were reduced by US$1.8 billion in investment losses in Internet-venture firm CMGI Inc.
The company's largest shareholder is Putnam Investment Management Inc, which as of June owned 65.1 million shares, or 3.8 percent.
Excluding a US$379 million investment loss in CMGI in the recent period, the company would have had a loss of US$0.07 a share. On that basis, which doesn't conform with generally accepted accounting practices, Compaq missed analyst forecasts for a loss of US$0.06 a share.
Compaq's PC division posted an operating loss of US$248 million on sales of US$3.26 billion, down 42 percent from the same period last year. Sales in the division that makes more-profitable servers and storage devices declined 38 percent to US$2.38 billion, with a US$104 million operating loss. The company's services division posted revenue growth of 2.1 percent to US$1.88 billion and had operating income of US$284 million.
"The third quarter was one of the most challenging quarters ever for Compaq and for our industry," Capellas said on a conference call.
Capellas said the economy and spending on computer-related products should begin to pick up in the second half next year.
"Companies will still undertake major IT projects, but they will do fewer of them," Capellas said.
Compaq's gross margin, or the percentage of sales left after subtracting production costs, narrowed to 19.9 percent in the third quarter from 23 percent a year earlier.
The company, which has had trouble competing with the direct-distribution model of larger rival Dell Computer Corp, said it reduced inventory levels by US$600 million. The company has pared inventory by US$1.5 billion this year.
When Compaq reduced its forecast on Oct. 1, it said customers had delayed purchases because they weren't sure whether products would be available after the company is acquired by Hewlett-Packard. Today, Capellas said Compaq hasn't seen "a dramatic effect" from customers putting off purchases.
Microsoft's new operating system, Windows XP, hasn't yet given a lift to sales, said Capellas. Windows XP, which is being officially unveiled today by Microsoft, has been on sale by PC makers since last month. It might spur sales closer to Christmas, Capellas said.
"It will make things better for sure," he said. "How much better, we'll see."
Compaq expects a "modest" seasonal increase in North America this quarter, with some stabilization in Europe, said Capellas. The Japanese economy is still slowing, while Singapore, South Korea and the rest of Asia Pacific are feeling the effects of lackluster growth in US and Japanese markets, he said. China is relatively strong, while Latin America is weak, Capellas said.
Matrix's Katz, who has criticized Compaq's management, said the stock has fallen so much that it might be a good future investment.
"The key in looking at Compaq is that their stock price versus valuation metrics are off the charts," he said. "It's a dirt-cheap stock."
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