Compaq Back in Black (Breakfast News) October 27, 1999


Wednesday, October 27, 1999

"Punctuality is one of the cardinal virtues. Always insist on it in your subordinates and dependents."
-- Don Marquis

Compaq Back in Black

By Richard McCaffery (TMF Gibson)

Things are looking brighter for computer hardware and services company Compaq (NYSE: CPQ), at least a little.

After slipping into the red last quarter, Compaq reported a profit (excluding one-time charges) of $117 million, or $0.07 per share, for its fiscal third quarter, compared to net income of $115 million, or $0.07 per share, a year ago. The results beat analyst estimates by $0.02 per share, according to IBES International.

The Houston-based company also boosted gross margins 2% to 23% of sales, and cut operating expenses as part of a major restructuring effort initiated by Michael Capellas, Compaq's new president and chief executive. The changes involved efforts to streamline Compaq's distribution strategy, cut costs, and improve efficiency. As expected, the company took a charge of $868 million this quarter as a result of the changes.

The big problem for Compaq, however, is that leaner competitors Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) have all the momentum Compaq lost since acquiring hardware and services firm Digital Equipment Corp. last year. In addition, falling computer prices and margin pressures have eaten away at Compaq's profitability.

Both Dell and Gateway employ a direct sales model, which keeps inventory low, improves efficiency, and gets the companies closer to customers. Compaq has made some changes toward this model, but still sells primarily through distributors and retailers.

For a quick comparison, look at Gateway's latest balance sheet. For the quarter ended September 30, Gateway had $172 million in inventory, while it sold $2.2 billion in merchandise. In other words, based on sales, it's turning its inventory about 12 times a quarter, which means it's bringing in lots of cash and doesn't have to worry about computers depreciating in warehouses. Compaq has made nice strides in this area, but turned its inventory just four times in the last quarter.

Erosion of Compaq's market share became evident this quarter. Dell sold more computers in the U.S. over the last three months than any competitor, taking the title away from Compaq for the first time. Worldwide, Compaq kept its title as the world's number one computer manufacturer.

Revenue from Compaq's three global business units was flat or fell sequentially. Its Commercial PC segment reported an operating loss of $169 million, compared to a profit of $116 million last year at this time. Compaq said price pressures, the earthquake in Taiwan, and reductions in channel inventory caused the shortfall.

Compaq's stock closed yesterday at $20, down more than half from a 52-week high of $51 in January.

News to Go

PC software giant Microsoft (Nasdaq: MSFT) said it won't ship Windows 2000, its latest operating system, to customers until February 17, The Wall Street Journal reported. The product was already more than a year late.

Online auction leader eBay (Nasdaq: EBAY) reported consolidated net income (excluding non-cash charges) of $3.2 million for the third quarter, or $0.02 per diluted share, as both sales and the number of registered users increased. Last year the company reported net income of $1.8 million, or $0.02 per share.

Telecommunications equipment maker Nortel (NYSE: NT) reported Q3 net earnings from operations of $380 million, or $0.28 per share, compared to $236 million, or $0.21 per share a year ago, as sales of optical, wireless, high-speed access, Internet Protocol (IP), and other equipment increased 30% to $5.39 billion.

Newspaper publisher Knight-Ridder (NYSE: KRI) plans to repurchase 6 million shares of stock, boosting its buyback program to a total of 8.2 million shares. The company also declared a dividend of $0.23 per share on its common stock and $2.30 per share on its preferred stock.

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