Compaq on the comeback trail
Kurt King, analyst, Banc of America Securities
Results like this will likely reinforce confidence in CEO Michael Capellas. The former college linebacker has been running Compaq the way he played football: focusing on short-term objectives to achieve long-term goals. That management style, which contrasts sharply with the aim-high approach of former Compaq CEO Eckhard Pfeiffer, is reviving the struggling computer maker.
"The most important thing that's really happening over at Compaq the last few quarters is Michael Capellas is setting goals he is achieving or attaining ahead of time," said Technology Business Research analyst Lindy Lesperance, who complimented what she called the "let's be reasonable" management style.
Case in point: Compaq's commercial PC division, which returned to profitability during the second quarter, ahead of schedule.
"My feeling is it's going to be a strong quarter for Compaq," Lesperance said. "The commercial business is going to remain profitable, potentially even improving as they continue to push the direct model."
Although the results will bring back confidence, Compaq, like other companies, has not managed to dodge the PC flu. Sequential growth will be slower than in normal years, and consumer sales remain a major question mark.
Analyst projections on revenue growth vary widely, anywhere from around 9 percent to more than 16 percent. This contrasts starkly to the second quarter, when a somewhat reinvigorated Compaq saw revenue go up 8 percent year over year on $10.1 billion in sales.
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Prudential Securities analyst Kimberly Alexy said in a report issued Monday that "we continue to expect the company to meet (third-quarter) expectations and remain optimistic into" the fourth quarter.
Gartner analyst Kevin Knox thinks revenue growth is a tough call, setting a range of 9 percent to 14 percent.
"There are still some questions out there affecting revenue, and consumer is the big one," he said. "And they've got some competition. HP has done well at retail, and this has been a challenge for Compaq."
Analysts consistently expressed concerns over the health of Compaq's consumer division, which in the second quarter accounted for about 16 percent of revenue. During that quarter, while revenue rose 32 percent year over year, income declined by about a third. Operating margins of about 1.9 percent indicated larger problems, as the division grappled with stiff competition from Hewlett-Packard and struggled to generate non-hardware sales, such as services and software.
In September retail sales, for example, HP retook the sales lead from Compaq, 38.2 percent market share to 32.6 percent, according to market researcher PC Data.
More troubling are signs Compaq is losing ground in consumer notebooks after years of dominance, said PC Data analyst Stephen Baker.
"The biggest danger is probably in the notebook space, with Sony and HP coming on strong," he said. "Until the last six months, Compaq had huge share lead and only Toshiba to beat up on."
Compaq's retail notebook share dropped to 37.5 percent in September, from 44 percent a month earlier, as Sony and HP--with 23 percent and 16.5 percent share, respectively--gained ground.
Lesperance and Knox said they would be watching Compaq's device strategy, which it expanded on in August with MP3 and Internet appliances and other devices. The company also is ramping up production of its iPaq Pocket PC handheld to 100,000 units a month in the first quarter of next year due to unexpected demand.
"The iPaq Pocket PC, they're doing a lot of volume in that, and they seem to think their future lies in these small form factors," said IDC analyst Roger Kay.
Knox said the way Compaq crunches its iPaq numbers could greatly affect the consumer group, depending on "where the iPaq handheld revenue gets recorded." It had been counted with the commercial group but could be moved to consumer.
The biggest change during the third quarter is expected to be a shift in revenue mix, as a revived commercial PC division stands ready to surpass enterprise sales. During the second quarter, 34 percent of Compaq's revenue came from sales of large systems and 33 percent from commercial PCs. Services made up about 13 percent of the mix.
But this does not mean poor performance from the business group. PC servers are expected to show strong growth, with some uptake in high-end Himalaya sales. More uncertain is storage and sales of Compaq's new AlphaServer GS, or Wildfire, server. Compaq had forecast $1 billion in Wildfire sales this year.
"PC servers, notebooks and commercial PCs are where the revenue's going to be this quarter," Knox said.
While Compaq shares appear stuck near the $30 range, financial analysts remain hopeful of improvement, particularly going into the fourth quarter.
Credit Suisse First Boston analyst Kevin McCarthy set a 12-month target price of $42.50 per share, and Robert Cihra at ING Barings set a price target range of $40 to $45 per share.
Compaq shares closed Monday at $27.70, down 93 cents, or 3.25 percent.