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Compaq profits meet lowered forecasts

Compaq reports profits of $281 million, in line with lowered Wall Street expectations.

Compaq Computer reported first-quarter profits of $281 million, or 16 cents a share--about half of what Wall Street originally expected--while lacing its report with harsh statements about its earnings.

Although Wall Street had expected earnings of 16 cents a share, this figure reflected an estimate that had been essentially cut in half after the earnings warning from Compaq two weeks ago.

The No. 1 PC maker said today that sales in the first quarter of this year are up 66 percent compared to last year. Compaq reported first-quarter revenue of $9.4 billion for the quarter ending March 31, compared to the $5.7 billion level of last year.

In an unusually candid statement, Benjamin Rosen, Compaq chairman and acting chief executive officer said: "Our first-quarter results are disappointing and unacceptable. We will aggressively pursue the actions necessary to realize our enormous potential, achieve our traditional levels of profitable growth, and build long-term shareholder value."

Rosen took over after Benjamin Rosen Eckhard Peiffer was ousted on Sunday.

Product sales for the quarter were $7.8 billion, up $2.2 billion or approximately 40 percent above the reported first quarter of 1998. Compaq said that its worldwide product inventories are just less than four weeks, better than before but still more than Dell Computer, which sells directly to its customers.

"The company's sales performance was offset by a number of factors. The first-quarter performance for the commercial PC business was below internal expectations. Less-than-anticipated market demand, increased competitive pricing, and growth below plan all contributed to a revenue shortfall in this business," Compaq said in a statement.

There was a "considerable moderation of commercial PC demand as compared to years past," Rosen said today.

Echoing statements from analysts over the last few days, Compaq said: "It did not achieve the revenue performance needed in to meet its expected levels of product revenue and gross margin for the quarter."

"We haven't done as much as we could have in putting all of the elements together. It takes a while to get the synergies going," Rosen said in an earlier interview.

Compaq has not been able to exploit its acquisitions of corporate computer makers Tandem and Digital Equipment enough to offset a surge in low-end PC sales, said Bruce Stephen, an analyst with International Data Corporation.

"If you sell more doughnuts, then expect to sell more caviar...they don't have the right mix yet," he said.

Michael Larson, an executive in charge of consumer sales, said that Compaq "competes profitably with Emachines." That upstart manufacturer sells consumer PCs costing as little as $399 and has gained market share in the last two quarters at the expense of major PC companies.

Larson also said that the market will continue to see more "subsidized models," alluding to start-ups such as DirectWeb and Gobi, and "we'll do all of them."

Service sales were solid, totaling $1.6 billion compared to $113 million last year. "The total services business performance met company expectations for the quarter, and the company continues to expect accelerated and profitable growth going forward," Larson said.

Compaq said it had about $3.6 billion in cash and that it had allocated $215 million for restructuring and $219 million for the acquisition of It also spent $126 million for repurchasing of Digital Equipment stock.

The company also cited the following positive developments:

• The company's consumer business continued to be robust, with unit growth at more than two times the market.
• In commercial PCs, the company maintained its No. 1 worldwide share position, and continued to exceed its plans with its small and medium business direct sales Prosignia products.
• The company launched a new class of servers for small and medium businesses, with its NeoServer. Initial acceptance and sales exceeded the company's expectations.
• The company's storage business continued to gain momentum, and grew sequentially from the fourth quarter to the first quarter.
• In services, the company launched its Next Generation Networks service offering. It also continued to see synergies between its service and product businesses.
• The company's Internet business thrived during the quarter, highlighted by reaching a 34-percent marketshare in Web servers.