Compaq CEO blames loss on "perfect storm"
Blaming the Sept. 11 terrorist attacks in part for worse-than-expected sales, the company warns that it will post an operating loss in the third quarter.
The PC giant said revenue for the third quarter is expected to be in the range of $7.4 billion to $7.5 billion, a 12 percent drop from the second quarter. The company expects an operating loss in the range of 5 cents to 7 cents per share.
In July, Compaq said it expected third-quarter revenue to be in the range of $8 billion to $8.4 billion, with earnings per share of 7 cents to 9 cents.
A consensus of analysts had been expecting Compaq to earn 5 cents per share, according to First Call.
"We lost about a week's worth of business during the month of September," Compaq Chief Financial Officer Jeff Clarke said during a conference call, noting that September typically accounts for about half of third-quarter sales.
Compaq's stock closed up 2 cents, or less than 1 percent, at $8.33 on Monday. In after-hours trading, it fell to $7.66.
Last month, Hewlett-Packard announced plans to buy Compaq in a stock deal initially valued at $25 billion. The deal is awaiting shareholder and regulatory approval and is slated to close in the first half of 2002.
Clarke said that savings from the company's ongoing cost-cutting moves were not able to offset problems in the past month, including slowed sales in the wake of the HP deal and logistics problems caused by the terrorist attacks and a typhoon in Taiwan.
"Through August we were on track to meet earnings," Clarke said.
Chief Executive Michael Capellas called the various events a "perfect storm" of troubles, adding that the future remains cloudy.
"As we look out, visibility is particularly tough," he said during the call.
Last week, Merrill Lynch cut its sales forecast for the PC industry, noting a weak global economy and the impact of the terrorist attacks on sales.
It stands to reason that the attacks on the World Trade Center and the Pentagon could force PC makers to miss estimates. September is a critical month for the PC industry, accounting for anywhere from 50 percent to 70 percent of the quarter's sales.
Other tech companies are likely to follow Compaq with warnings of their own, analysts say.
"You are likely to see a lot of preannouncements over the coming days, simply because the attacks occurred so late in the quarter," Needham analyst Charles Wolf said. He added that Wall Street has already been factoring lower third-quarter sales into current stock prices.
"I think the market was expecting this," Wolf said of Compaq's warning.
Lehman Brothers analyst Dan Niles also sees other companies following in Compaq's footsteps.
"I pretty much expect every one of my companies to lower forecasts. It's just a question of how much," said Niles, who covers the PC chip and hardware industries. "Compaq is a good example. I knew they would miss numbers, but the revenue miss was a little more than I expected."
Niles said there are still many unknowns for the tech industry, including the possibility of more supply disruptions if and when retaliations for the attacks occur. But he added it is already clear that he will need to slash his forecast for Compaq to earn 60 cents per share next year.
"Our belief is that our (earnings) estimates are going to have to be cut in half for next year," he said.
Compaq's third quarter ended Sunday. The company plans to report full results in mid-October.
The PC maker also said Monday it will take a $500 million noncash charge to write down the value of some investments, particularly related to its investment in Internet incubator CMGI. In 1999, Compaq acquired about 17 percent of CMGI when it sold AltaVista to the company.
In July, Houston-based Compaq announced that it would cut 8,500 jobs this year--1,500 more than it had previously planned. Later that month, HP said it would trim 6,000 jobs. In addition, HP and Compaq said in September that they will lay off another 15,000 workers once the merger is completed.
Clarke did not specifically say the slower sales would lead to more job cuts before the merger, but left that possibility open.
"Any time there is weak market demand, we will look harder...at our cost cutting," Clarke said during Monday's call.
Separately, HP said Monday in a regulatory filing that it may cut more jobs.
"During the period between now and the closing, HP will continue to make decisions that may involve further reductions in staffing levels in defined areas of the company," HP said in a filing with the Securities and Exchange Commission.
"Actions taken may include decisions that are considered 'business as usual' for HP, such as consolidations, decisions to exit particular businesses and divestitures (and) outsourcing."