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Compaq hits profit marks on consumer sales, cost cutting

The Houston-based computer maker reports net income of $281 million on revenues of $9.51 billion, as executives say it's time for a comeback.

It's time for the comeback, executives from Compaq Computer said yesterday, announcing a plan for the future after the company posted relatively solid earnings.

Several influential investment banks today agreed with the company's assessment, boosting their ratings outlook for Compaq's stock. Still, shares of the computer maker slipped in morning trading, dipping 44 cents, or 1.45 percent, to $29.81. The stock has traded as high as $34 and as low as $18.25 during the past 52 weeks.

Merrill Lynch raised Compaq's outlook to "near-term accumulate" from "near-term neutral." Salomon Smith Barney upgraded Compaq to "buy" from "neutral," and ING Barings upped it to "strong buy" from "buy."

The upgrades come after the Houston-based computer maker reported net income of $281 million, or 16 cents in earnings per share for the first quarter excluding investment activities, on revenues of $9.51 billion. Including investment gains, net income came to $325 million, or 19 cents a share.

Although the figures are essentially flat from a year ago and didn't exceed expectations, Compaq CEO Michael Capellas and other executives stated that the Y2K slowdown, excess operational costs and other factors that hampered the company's growth in the past year are lifting.

Further, Compaq said it would launch a variety of initiatives and products to raise both profits and the company's profile. New lines of servers, some with fairly high price tags, will begin to emerge, as will Internet appliances rigged with wireless technology.

The results, and the outlook, buoyed analysts. "It was very positive. Expectations were low in front of the call," said Kurt King, an analyst at Bank of America. "The highlight was commercial PC business. The real bear case against Compaq was that they would never break even in commercial PCs. They virtually broke even in commercial PCs."

Compaq also said it would unveil a major branding and advertising campaign in the coming weeks to re-establish its position as one of the dominant computing powers.

"We know we can continue to drive more efficiency, and we will," Capellas told investors on the conference call. "But we've got to drive the marketing message. That is the next great challenge...You'll see TV ads, you'll see Web ads, you'll see print ads. You can expect us to get a little edgy."

The product and marketing push are the latest steps in a drama that began roughly a year ago, when then-CEO Eckhard Pfeiffer was ousted amid excess inventories and disappointing profits.

Like other computer makers, Compaq was hurt by slow sales in Europe and to corporate America in the first quarter. Overall corporate weakness led to sluggish sales for servers, corporate desktops, consulting services and storage, Capellas said.

"The first one has not been an easy one for Compaq in the last three years," Capellas said.

Despite the corporate freeze, the company managed to eke out some financial highlights for the quarter. Operating expenses dropped for the third straight quarter in a row, the company said. Expenses fell to $1.76 billion, down 7 percent from a year ago and 8 percent from the fourth quarter.

Revenue from consumer PCs, meanwhile, rose 35 percent to $1.8 billion, while consumer PC shipments rose by 50 percent.

Compaq lost $19 million on commercial PC sales, but this largely was a positive, according to King. Last quarter, the company lost $78 million on business boxes.

Demand is likely to begin picking up in the second quarter and then to accelerate in the second half, in strong contrast to recent comments from Microsoft.

"I am more bullish (than Microsoft)," Capellas stated. "There will be very strong sales in Web servers, and Windows 2000 will be a part of that."

Windows 2000 also will prompt businesses to buy more powerful PCs "with higher (average unit prices)," he added.

To capitalize on the expected demand, Compaq will revamp several of its product lines. Among the highlights:

• Servers. The company will introduce its high-end "Wildfire" servers for running data centers. Compaq's goal is to garner $1 billion from the sale of 2,500 of the systems this year. New Web servers will come out in the near future as well.

• PCs. The company will try to build profits in the commercial PC sector in the second quarter and then make a push for market share in the second half of the year. For the year, the company expects industry growth in the mid-teens.

• Consumers. Expect to see more appliances, devices and cross-marketing promotions with retailers and others. "In the Internet age, alliances are going to be more important than ever in driving revenue," Capellas said.

• Services. Compaq will "narrow" the scope of its services consulting group.

• Layoffs. The company hinted at more. "The next major challenge will be in reducing indirect manufacturing expenses," Capellas said.

Before the conference call, analysts said that Compaq could see increased profits and margins from server sales as time goes on. Dan Niles, an analyst at Robertson Stephens, said that barring any surprises, 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.