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Compaq investors look for a rebound

When Compaq CEO Michael Capellas faces Wall Street and shareholders today to deliver the computer maker's second-quarter results, he may find there's no one left to blame for poor performance.

There is no one left to blame.

This is the situation facing Compaq Computer CEO Michael Capellas when Wall Street and shareholders call him to an accounting today.

Capellas, who just completed his first year as Compaq's chief executive, will deliver second-quarter results during a 2:30 pm PT conference call.

The news will not be exciting, as the Houston-based PC maker untangles a logistical nightmare left by the regime of former CEO Eckhard Pfeiffer. A consensus of analysts polled by FirstCall/Thomson Financial puts estimated earnings per share at about 21 cents, with revenue close to $10 billion but growth in the single digits. A year earlier, Compaq lost $184 million, or 11 cents a share.

A year ago, when Capellas, a virtual unknown, reviewed earnings, he could look to the future while letting the old regime take the blame for poor performance. Now, he is the one accountable.

True to Capellas' methodical manner, Compaq has gained momentum slowly, and it continues to do so. Clearly, that has not been enough for investors, as Compaq's stock remains in the mid-to-upper $20 range, with little sign of significant upward movement. The stock's 52-week high is $34 and low, $18.25.

Analysts expect to see signs of future promise now that the company is under Capellas' strong guiding hand. But they and investors may have fewer tools to gauge the company's financial health.

Sources close to Compaq indicate the PC maker may cut back on the amount of financial detail it provides. Under the Pfeiffer regime, the company often offered scant details into its inner workings, whereas under Capellas Compaq has been remarkably forthcoming.

"They certainly have been providing more data than anyone else," Technology Business Research analyst Lindy Lesperance said. "They're providing enough data for all their competitors to benchmark themselves against Compaq."

Performance among Compaq's three major divisions--enterprise computing and services, commercial PCs and consumer--is expected to be mixed. The brightest spots look to be consumer, PC servers and Alpha servers. Compaq is also expected to have some good news on streamlining its convoluted manufacturing and distribution operation, which has made the cost of producing and selling PCs nearly double that of rival Dell Computer.

"One of the big issues on Compaq's side was their manufacturing spaghetti," International Data Corp. analyst Roger Kay said. "Things now look marginally better."

Compaq's commercial PC business is expected to be near break-even, despite an industrywide sales slowdown.

"The big news will be the PC business," Lesperance said. "If it's not break-even, it will be close. I know Capellas has been putting some pressure on to do it for the second quarter, and that would be a nice kind of upside surprise if that happens."

In a March report, market researcher Gartner said Compaq had put all the pieces together for solid growth and pulling its commercial PC business out of a dark hole of unprofitability. The division lost $19 million in the first quarter, down significantly from $78 million and $169 million losses in the fourth and third quarters, respectively.

Capellas is expected to report that the commercial PC division, which in the last quarter accounted for 31 percent of revenue, benefited from distribution assets acquired from bankrupt distributor Inacom and increased direct sales.

While boosting profits, Inacom is expected to drag on them as well. The distributor, which in June closed its doors and filed for Chapter 11 bankruptcy, owed Compaq more than $90 million, much of which the PC maker may have to write off.

The consumer PC division, consistently a solid performer, is expected to do well, even as it struggles with slow seasonal signs and tough competition from rival Hewlett-Packard.

"The bright spot is still consumer, even though it's been somewhat seasonally soft," US Bancorp Piper Jaffray analyst Amir Ahari said. "It should continue to do well, given the marketplace is a lot less crowded. That should be a bright spot for them."

But analysts warn signs of trouble loom over Compaq's consumer PC sales. HP in February unseated Compaq as the retail-sales leader and has since widened the gap. In June, HP had 36 percent market share in overall retail sales, including online and catalog, according to market researcher PC Data, compared with Compaq's 30.8 percent. In stores, HP walloped Compaq 42.8 percent to 28.9 percent.