Wall Street wait-and-see on Compaq services

Compaq hosted a Global Services Day in New York on Thursday in a move to put the PC maker's services strategy on Wall Street's radar. In the second quarter, Compaq derived 23 percent of its revenue from services, but many consumers, customers and analysts largely think of the company as a box maker.

"We have a compelling story to tell, and we're deliberate about making sure it's known to a wider audience," said Peter Blackmore, executive vice president of sales and services at Compaq.

Wall Street has been receptive to Compaq's services plans, but its analysts note that the company has a tough road to follow in becoming like IBM. Blackmore said Compaq is hoping to get a third of its sales from services in the next two to three years.

At a presentation at the trendy W Hotel New York at Union Square, Compaq executives outlined growth plans and highlighted customers such as Blue Cross Blue Shield of Michigan, Bank of America and SBC Communications.

Blackmore said the company's services strategy revolves around targeting key vertical markets. Compaq has a strong foothold in the telecom and financial markets, but is targeting other areas, notably health care and retail. The Houston-based company is likely to run into stiff competition from IBM and Hewlett-Packard.

To grow, Compaq plans to reach new customers through acquisitions of smaller services companies. The computer maker, which has $500 million budgeted for acquisitions, recently tried to buy Proxicom, but was trumped by a higher bid. Blackmore said the price was simply too high.

That doesn't mean Compaq won't be receptive to other acquisitions of medium-sized companies that can help it occupy key vertical markets or expand internationally, said Blackmore. "The price has to be right, though," he said.

In a bevy of research notes Friday morning, Wall Street reaction was tepid. "We continue to like what Compaq management is doing to reengineer its business," said UBS Warburg analyst Don Young. "However, we remain concerned about continuing pressure on the fundamentals and risk of increased pricing pressure."

For instance, Prudential Securities analyst Kimberly Alexy complained that a sizable chunk--25 percent to 30 percent--of the company's services business was tied to supporting older Tandem and Alpha products, "which will likely continue to suffer from slowing product sales, suggesting support services growth will be sluggish at best."

But there were some glints of optimism. Robertson Stephens analyst Eric Rothdeutsch said he believes Compaq's services division should be able to achieve its goal of moving from 23 percent of sales to 30 percent of sales over the next year of so, with the existing services business driving double-digit growth.

He contrasted Compaq's approach, which relies on outsourcing and partnering with companies such as Electronic Data Systems and Computer Sciences, with that of IBM, which competes directly with those companies.

In those deals, Compaq provides the systems integration and hardware solutions for customers, and "we look for every dollar generated in systems integration to bring in an additional dollar of hardware revenue to Compaq," said Rothdeutsch.