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Compaq earnings to reflect year of turmoil

Any surprises in the company's earnings report could be devastating: Investors hammered Microsoft and IBM after they warned of slowing revenue growth.

    When it reports earnings later today, Compaq Computer is expected to show some modest revenue growth and, in the process, to close the book on a tortuous year.

    Early last April, Compaq warned of a first-quarter earnings shortfall prompted by a vicious price war. Within days, CEO Eckhard Pfeiffer and chief financial officer Earl Mason were out, to be followed by a parade of high-level executives. Company insider Michael Capellas was later appointed to replace Pfeiffer.

    One year later, all eyes once again will be focused on earnings and the company's outlook for the rest of the year. Any surprises could be devastating: Investors hammered Microsoft and IBM after the companies reported earnings and warned of slowing revenue growth.

    Analysts surveyed by First Call predict that the Houston, Texas-based computer maker will post earnings of 16 cents a share for the first quarter, compared with 16 cents for the year-ago quarter.

    Dan Niles, an analyst at Robertson Stephens, forecasts revenues of slightly less than $9.5 billion, while Gillian Munson of Morgan Stanley forecasts revenues of $9.7 billion for the quarter. A year ago, Compaq generated $9.4 billion in revenues for the quarter.

    "The top line will come out less than expected. This is something we've been counting on for a long time, and other people have speculated on this as well," said Niles, who rates the shares a "strong buy."

    Barring any surprises, Niles believes the company can increase its profit margins by 10 percent to 12 percent during the next 12 to 18 months, up considerably from 4 percent in the fourth quarter. He also thinks the company's server business will continue to show strong gains.

    Compaq shares dipped $1.19 yesterday to close at $26.25. In the past year, the shares have risen 9 percent, compared with gains of 24 percent for Dell Computer, 60 percent for Gateway and 77 percent for Hewlett-Packard.

    "The stock has been treading water all year," said Ashok Kumar, an analyst with Piper Jaffray. He added that he expects Compaq will "struggle to make consensus expectations...and if they do, it will be due to nonoperational items."

    Although sales of PCs to businesses and consumers have been less than spectacular, Kumar said a sterling performance in the company's server business and cost reductions from layoffs will help the company meet expectations. He added that Compaq's operating expenses are twice those of rival Dell.

    Last year, Compaq reported earnings of $569 million, or 34 cents a share, on revenues of $38.5 billion. The results, however, included a $1.2 billion gain from the sale of certain business assets and one-time charges of $868 million. Excluding unusual items, annual earnings were $237 million.

    Since replacing Pfeiffer at Compaq's helm last July, Capellas has launched several initiatives to get the company back on track. One of the first orders of business: The company announced it planned to shed 8,000 jobs just days after Capellas became CEO.

    Last fall, Compaq unveiled a slimline PC and an ultraportable notebook that emphasized color and design, borrowing a page from Apple Computer and its popular iMac. Late last year, Compaq attempted to bolster its beleaguered PC business with its small-scale iPaq, a business computer sold for $499.

    In January, the company said it planned to start selling more of its computers directly to customers. Compaq executives predicted that approximately 60 percent of its PCs for the commercial market in North America would be sold directly to customers--rather than through distributors or dealers--by the end of the year.

    Also in January, the company bought distribution facilities and other assets from PC distributor Inacom for $370 million in cash.

    Last week, the company laid off approximately 450 employees, most of whom worked in the commercial PC group.

    In the first quarter, Compaq saw its worldwide market share in terms of computers shipped drop from 12.9 percent to 12.5 percent, according to Dataquest. U.S. market share, however, increased from 15.7 percent to 16.4 percent over the same period a year ago.

    Compaq trails Dell in U.S. market share, according to Dataquest.