Compaq reports drop in revenue

Compaq reported fourth-quarter net income of $332 million, or 19 cents a share, on revenues of $10.5 billion. In the same quarter a year ago, Compaq earned $758 million, or 43 cents a share, on $10.9 billion in sales.

A consensus of analysts polled by First Call had predicted the Houston-based PC maker would post profits of 16 cents a share for the three-month period ended Dec. 31. In its report, Compaq noted a one-time gain of $50 million in other income, or about 3 cents a share.

For the full year, Compaq reported earnings of $569 million, or 34 cents a share, on revenues of $38.5 billion. The results, however, include 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.

In a conference call, Compaq CEO Michael Capellas told financial analysts he anticipates 2000 revenues will grow by 15 percent over 1999, despite a sluggish start.

"The first quarter will start out a little bit slow," Capellas said according to Reuters, adding: "We expect revenue to decline quarter-to-quarter due to seasonality and ... be backloaded due to the release of Windows 2000."

Microsoft's newest business-use operating system is due to launch in mid-February, which may depress PC sales as buyers wait for its debut. PC makers quietly began shipping systems loaded with Windows 2000 earlier this week, however.

Compaq's goal is for its vital commercial PC group to regain profitability, according to Capellas. The business system unit lost $79 million in the fourth quarter, an improvement on the third quarter's loss of $169 million. "I feel good about overall momentum," Capellas said.

The company has scheduled its annual meeting with financial analysts for Friday.

Today's earnings surprise comes amid renewed optimism about the company's prospects. Nearly a year ago, Compaq outraged investors by delivering disappointing earnings because of inventory problems. In April, the company fired CEO Eckhard Pfeiffer, who was followed out the door by several top executives.

Capellas became CEO last summer. Over the past several months, Compaq's shares have virtually doubled after hitting a 52-week low of $18. Investors are also willing to pay the same lofty price-to-earnings ratio as they would for Dell, about 30 times their expected earnings for 2000.

In the past two weeks, two analysts have upgraded their recommendations to "buy" from "hold."

But while the computer maker has shown signs of improvement, analysts say the jury is still out on whether the company is truly on the road to recovery. The company lost market share in the United States and worldwide in 1999. And they note that given Compaq's low share price, it's an attractive buy because of the relatively low risk involved in making an investment.

The fourth quarter is also traditionally a strong one for Compaq.

"During the quarter we also introduced our iPaq Internet device, a powerful but simplified product that eliminates legacy slots and ports," Capellas said. "Advanced orders have exceeded our expectations, and we will begin taking shipping this week."

Capellas painted iPaq as an important product for Compaq as it seeks to revitalize its commercial PC division. Windows 2000 will also play an important role in Compaq's commercial PC strategy.

"We began shipping platforms loaded with Windows 2000 three days ago," Capellas said. "Windows 2000 was developed on Compaq systems, and we have already deployed the operating system on more than 15,000 desktops and 300 servers throughout our company."

Capellas said he expects Windows 2000 to be an important "driver of clients, servers and services."

Among the highlights in today's report, Compaq said gross margins in the latest quarter were 22.2 percent, down 1.1 percent from the previous quarter. Inventory on dealer shelves was 3.8 weeks versus 4.1 weeks a year earlier. This compares to less than a week for Apple and Dell Computer.

Capellas said three factors affected gross margins for the quarter: bigger consumer PC sales due to the holidays, which typically are lower-margin products than commercial systems; the increase of memory and other component prices; and late-quarter sales slowdown of larger servers due to Y2K.

"If we're going to drive the margins, obviously we're going to have to do some things around efficiency," Capellas said. He pointed to the recent purchase of assembly and distribution facilities from Inacom as one means of quickly improving efficiency and cutting manufacturing and distribution costs.

Technology Business Research analyst Lindy Lesperance said it typically cost Compaq twice as much as Dell to produce a PC, largely because of the inefficiencies of its indirect model.

Mike Winkler, senior vice president and Group General manager of the commercial personal computing group, told financial analysts his group was tackling the profit and margin problem.

In terms of specific geographies, North America revenue grew by 8 percent, Europe by 24 percent and Latin America by 7 percent. While flat in China, revenue grew 13 percent in the Asia-Pacific region and 21 percent in Japan.

Revenue for the Enterprise Solutions and Services Group, which was 51 percent of Compaq's total, reached $5.3 billion, down 3 percent from a year earlier but up 8 percent from the third quarter. Operating income grew 17 percent year over year and 19 percent sequentially.

By the end of the fourth quarter, Compaq had completed about 1,700 of 7,000 expected layoffs. The remainder will take place during the first half of this year. Early layoffs will include 500 people from the closing of a facility in New Hampshire and another 1,600 from a manufacturing plant closing in Singapore. By December, Compaq also had reduced by 2,600 the number of temporary workers it employs.

While layoffs continued, Compaq also added staff in some areas: 600 services and sales staff and 300 call-center staff supporting direct sales.

Reuters contributed to this report.