Winkler helps steer Compaq's PC division back to profits

Winkler, senior vice president of Compaq's commercial computer group, this week roped the money-losing division and pulled it into the profitability corral.

In second-quarter earnings announced Tuesday, Compaq revealed that the division, which lost $19 million in the first quarter and bled red for a year, turned a $62 million profit--a quarter ahead of schedule.

Winkler is a seasoned cowhand at Compaq's Houston headquarters, one of a handful of top executives surviving the ouster of former CEO Eckhard Pfeiffer.

During the past year, Winkler worked to trim costs from Compaq's convoluted manufacturing and distribution program, in part by emphasizing direct sales rather than relying on dealers and using distribution assets acquired from Inacom. He also relied more heavily on a program called PartnerDirect, which offers dealers a fee when Compaq fulfills orders directly to their customers.

CNET News.com talked to Winkler about how he orchestrated a turnaround in the commercial PC division and Compaq's renewed innovation with handhelds and other products.

CNET News.com: You returned to profitability a quarter earlier than expected. So how did you do it?
Winkler: It's a lot of things. The first thing I would point out is there weren't any bloopers here. Every one of our regions around the world was profitable. Every one of our product divisions--desktops, portables, workstations, Internet appliances--were all profitable.

That points to the fact we fundamentally re-engineered and restructured the business here for much-improved performance.

Which products made the difference on the bottom line?
The portable lineup was rewarded with 31 percent growth year-over-year--in fact, 41 percent sequentially. And that's a big part of the turnaround, because those tend to be higher-profit, higher-margin devices.

The iPaq desk-side unit, the Internet appliance, was a big, strong contributor. And as you know, that's an entirely direct product that we sell. Those things are selling like hotcakes.

The iPaq comes in a legacy-free model that abandons serial and parallel ports for USB and a legacy-lite model supporting the old connections. Are corporate customers really going for the legacy-free models?
The interesting thing is there are more legacy-free (models) sold than legacy lite, which floors me, too.

The second is over 50 percent choose Windows 2000. A lot of people have "="" hspace="10" vspace="10" border="0" align="right" alt="The market in the future is going to shift from what's your business model to do you have superior technology and product alternatives overall."> said, "Well, the uptake of Windows 2000 hasn't been aggressive in the corporate world as people thought." On the iPaq, it's amazing. Over half the units go out with it.

By the way, that's an exponential growth rate. We expect we'll do a $1 billion run rate going out this year, just on those desk-side iPaqs.

Compaq developed iPaq in just 100 days and said it would help reinvigorate commercial PC sales. Has that happened?
That product and the iPaq handheld, which have been winning all these awards and selling like crazy, have put a new aura on Compaq. The Compaq of old, of innovation and such, is starting to be restored. And I think that halo has helped the sales of all our products, by the way.

Your iPaq handheld is so popular people are auctioning it off on eBay.

Yes, and paying $300 over (the retail price). They're getting out into the retail channels, too, as well as into our own DirectPlus channels, so those are getting far more readily available, even though it looks like the backlog is probably (such) that we're not going to fully be able to meet demand until sometime in the early fourth quarter.

Based on second-quarter PC numbers from International Data Corp. and Dataquest, it was a tough sales environment, and still you turned things around.
That's what makes us even more proud. We didn't have the wind at our back here. And even having to paddle upstream a bit, we pulled it over. And that's a real indication of how we changed the fundamentals of the business.

Is it sustainable?
It absolutely is, or I wouldn't be making such a big deal about it. The last thing I would ever want is in the next quarter or the quarter after that to have to apologize. After being a year in the red, I refuse to let that happen again in my career.

You made some important distribution changes after acquiring Custom Edge from Inacom in the first quarter. How did that help?
Certainly the acquisition of Custom Edge, the distribution assets of Inacom, helped. We put 30 percent of our North America volume through them the first full quarter we owned them.

Not only do we provide a lot of incremental services that come with that--configuration, custom image loads, asset tracking and management, tracking, lifecycle services, and management of rollouts--all of these provide additional revenue and margin opportunities.

We've moved over 100 of our major accounts to CEI, and they do the fulfillment and management of the rollouts for us. And that's much more profitable for us than the traditional way we worked through multiple tiers of distribution all the way to the customer.

How much cost does that take out of the process?
We've said publicly, we get half a dozen points of margin improvement. At the same time, I think we have re-engineered the channel. We are changing the distribution landscape in North America, without a doubt, and around the world because of these agent programs and PartnerDirect programs.

Most of the IDCs and others say that while the direct business continues to grow significantly, the majority of business for years to come will be in conjunction with channel partners, dealers and resellers, particularly with small business who need that guy on the corner, vertical specialist (and) hand holding. He's their outsourced IT department effectively.

How does Compaq benefit from these programs, where you pay the dealer a fee for letting you deal directly with his customer?
By creating this new PartnerDirect and agent model, we effectively deal directly with the customer and have all of the economics of direct, while involving the channel as an important partner in that regard. We've got a better model for serving the overall market.

But if you're paying these dealers, on average, 6 percent of the sale, where do you get the margin back?
But it's relatively small compared to the cost of carrying inventory, price downs, returns, in addition to their markups and their infrastructure funding. You're still saving six to eight points over the way we used to do it.

Where are you in terms of direct sales?
We have 40 percent direct in North America, as of the end of the second quarter, and 25 percent worldwide. We projected by the end of the year we would be at a run rate of 40 percent worldwide and 60 percent in North America. We're right on the curve to do that. Now direct means PartnerDirect agent as well as direct direct.

But the point is the PCs are coming direct from you rather than going through the dealers' hands?
That is correct.

As you look ahead, what is the most important thing you still have to do?
There was a feeling at one time (that) the PC business was commoditizing to one common beige box and that there would be no opportunity for differentiation. The thing that distinguished you was your cost structure.

I think that has changed in regard to what I call the third stage of the PC life cycle, where there is incredible opportunity for differentiation--through industrial design or new technology or wireless computing or simplification of devices or Internet appliances--that all come with the ability to generate a customer preference for you that wouldn't come in a beige-box world.

The market in the future is going to shift from "What's your business model?" to "Do you have superior technology and product alternatives overall?"

So what can we expect in the future then from Compaq?
What you'll see is Compaq leading the way in the convergence of commercial and consumer markets.

Does that mean a convergence in manufacturing with a single design that can be modified for both markets?
You will see more co-design and modular manufacturing and using common elements.