Tech Industry

Mixed bag for Compaq

The top computer maker's stock is up and it's expected to report earnings of 37 cents a share tomorrow, but competitive challenges remain.

Compaq Computer is expected to report earnings of 37 cents a share tomorrow, a nickel less than its earnings for the same quarter last year, and 47 cents in earnings per share for the year as the company continues to grapple with increased competition, declining PC prices, and the integration of Digital.

While Compaq's stock jumped on the news of its spin-off of AltaVista today, its bread and butter remains computer hardware, an area with fierce competition and uncertainties in the year ahead.

Like a lot of PC vendors, Compaq finds itself forced to sell more PCs for less money to maintain market share growth. Unit sales of lower-end systems were up in the quarter, for example, but higher margin desktop sales were down, according to analysts. In the end, Compaq likely shipped more products and took in more revenue for the fourth quarter, but saw a lower overall return.

For the entire year, revenue will likely come to $31.2 billion, down 17 percent from $37.7 billion in revenue reported 1997. Earnings per share, meanwhile, will likely decline by two-thirds, according to the consensus estimate from First Call, from $1.35 in 1997 to approximately 47 cents for 1998.

In order to meet projections of fourth-quarter sales, Compaq had to "stuff" about two weeks' worth of equipment into the distribution channel, theorized Ashok Kumar, an analyst with Piper Jaffray.

"We think they were essentially forced to ship more units," Kumar said. "This cannot continue ad infinitum."

The tactic of selling more equipment to distributors and resellers before the actual customers have placed orders probably won't come back to haunt Compaq the way it did in the last quarter of 1997, Kumar said.

Compaq's PC market share "took off" in December as a refreshed product line made its computers more competitive and Compaq "re-established its position as the No. 1 supplier of sub-$1,000 desktops," said Matt Sargent of ZD MarketIntelligence.

However, while Compaq grew stronger in low-end systems, those aren't as profitable to the company, Kumar noted. Or, as Technology Business Reports puts it, "Compaq is losing profitability in its PC business despite its ability to drive unit shipments."

Compaq also faces continuing competition from Dell Computer, which has been eating into Compaq's desktop and now server sales. To compete better with the likes of Dell, Compaq added a new line of computers products sold over the Web in November. Dell, however, has also seen a slowdown of sorts. Sequential sales growth in enterprise accounts has tapered off recently, according to some analysts.

Kumar also expects PC sales to "fall off a cliff" in the second half of 1999 as corporate computer budgets are redirected to dealing with the year 2000 problem.

Kumar referred to Compaq's Internet activities as a "sideshow," noting that Internet search engines are "easily replicated" and that "competitive differentiation factors are very fleeting."

And part of the company's core business, the acquisition of Digital, still isn't finished.

Compaq projected to cut 17,000 jobs as a result of the Digital acquisition, but TBR believes those layoffs and resulting cost savings weren't finished by the end of the year.