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THE DAY AHEAD: Compaq's revival hopes clouded by vague outlook

Larry Dignan
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Larry Dignan
4 min read

Compaq Computer (NYSE: CPQ) shareholders can enjoy the computer maker's better-than-expected earnings for a day, but don't get too euphoric -- there's a lot of work to do and a vague outlook may cloud any ray of hope.

The company, which hasn't given investors anything to cheer about lately, won a hollow victory after the bell Tuesday by beating Wall Street estimates with third quarter operating earnings of 7 cents a share.



Compaq: Hopeful or hopeless?




For perspective consider this comment: "The numbers are so low it doesn't matter," said Donaldson Lufkin & Jenrette analyst Kevin McCarthy ahead of the earnings report. "This is a company that should be earning 50 cents a share or more."

Revenue of $9.2 billion was below expectations, growth was anemic, enterprise sales were so-so, and the commercial PC business struggled amid competition from Dell Computer (Nasdaq: DELL). But at least Compaq cut costs and stopped the bleeding.

Given the throwaway nature of the quarter, the big deal for Compaq was the outlook for the fourth quarter and beyond. And the jury's still out.

Michael Capellas, Compaq's new CEO and turnaround guy, said the fourth quarter "defies an exact forecast." Capellas had no specific guidance, but said he expected a Year 2000 slowdown in November and December for its high-end enterprise products. Component shortages because of the Taiwan earthquake were also wild cards. PC sales would be seasonally strong.

And Compaq faces a tough comparison from a year ago, said Capellas. Given Compaq can barely see the fourth quarter, guidance for the next fiscal year was nil. For the fourth quarter analysts took away that Compaq will exceed third quarter EPS with revenue growth potentially less than 10 percent. But that's preliminary guesswork. First Call consensus is a profit of 19 cents a share for the fourth quarter.

The new Compaq has a new motto: There's no point in talking before you have your act together.

Conditioned by numerous disappointments, Capellas wouldn't be pinned down on guidance. Overall, Capellas made a nice debut on the conference call -- at least in terms of answering questions. He answered everything he could, gave benchmarks to follow and was much better at investor relations than his predecessor.

So how do we judge Compaq in the next quarter?

Look for a bunch of intangibles because actual figures are hard to come by. Capellas said fourth quarter benchmarks for Compaq should include:

  • A clearer enterprise message: Compaq has no clarity in the enterprise. The products may be strong, but it's hard to sort out. Capellas said the company will have a clear message and is in a good position going forward.

  • New products: Compaq said it will be unveiling cool products from desktops to palmtops. "There will be dramatic shifts on the PC side," said Capellas. "We need to do something to change the name of the game."

  • Services: Compaq touted services with its acquisition of Digital Equipment, but didn't mention services until late in the call. It has to show something from the Digital acquisition. If it's really the "crown jewel" why not mention it.

  • The usual stuff: As usual it'll pay to note how Compaq manages inventory and costs and handles the direct model onslaught. Also note revenue growth -- Compaq is in jeopardy of becoming Digital, which reported solid earnings but couldn't grow.

    Given the lack of details in the conference call, look for a mixed reaction from Wall Street analysts. Compaq supporters will see something positive, but analysts who have just about given up have nothing to get excited about. No guidance and no growth means no upgrades.

    Depending on what side you're on, Compaq is either coming back in baby steps or destined to be a commodity player. Only time will tell.

    EBay and interest gains

    So eBay (Nasdaq: EBAY) doubled estimates in the third quarter and still took a hit in aftermarket trading. What's the deal?

    Well, for starters gross merchandise sales were a bit light according to some analyst projections. EBay moved $741 million in goods in the quarter. The benefit of this metric is academic because the company only takes a slice of gross merchandise sales.

    And then there's those rising expenses. You could forgive those since the money is being spent on infrastructure. Expenses are better than outages.

    But the real number that has investors frazzled is in the balance sheet. EBay is making more in interest than it is on its site.

    The company had a loss from operations of $4.7 million, but earned $7 million in interest. Do the typical accounting provisions for charges and income taxes and you eventually get to the official net income $1.35 million. No matter how you do the math though, interest was the key to eBay's quarter.