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Compaq cuts 4Q, 2001 expectations

Welcome Compaq Computer (NYSE: CPQ) to the warning party.

The computer vendor became the latest PC maker to slash its financial targets for the fourth quarter and next year. After market close Tuesday, Compaq said it now expects to earn 28 to 30 cents per share in the fourth quarter, excluding one-time charges. First Call's survey of 22 analysts predicted a profit of 36 cents per share for the quarter ending Dec. 31.

Compaq also said it would record a non-cash charge of more than $1 billion in the fourth quarter, to reflect the decline in the value of certain holdings, mainly CMGi (Nasdaq: CMGI) and related investments.

Shares of Compaq traded at 20.19 in afterhours activity on the Island electronic communications network, following the warning. Compaq rose 0.53 to 20.77 in Tuesday's regular trading, prior to the fourth quarter preannouncement.

Fourth quarter revenue will range between $11.2 billion and $11.4 billion, or 8 to 10 percent below expectations, the company said. That sales shortfall is divided evenly among consumer PCs, commercial PCs and low-end servers, CEO Michael Capellas said, during a conference call with analysts.

Revenue in 2001 is now expected to increase 10 percent year-over-year. Earnings per share next year should rise 25 percent, which suggests a 2001 profit of $1.20 to $1.22 per share, based on the revised fourth quarter outlook. First Call consensus had been predicting a profit of $1.44 per share.

The second half of 2001 will be stronger than the first half, Capellas said.

Compaq joins a host of PC-related companies that have warned of disappointing results in the current quarter. Gateway (NYSE: GTW), Micron Electronics (Nasdaq: MUEI), Apple Computer (Nasdaq: AAPL), Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) have all said they would fall short of December quarter expectations.

And like those companies, Compaq -- which in previous weeks said it was comfortable with analysts' original estimates -- blamed much of its disappointment on weak consumer demand.

"While we had a good start to the fourth quarter, it is now clear that market confidence has wavered and that we will be affected by the general softness in U.S. consumer, small and medium business and dot com markets," Capellas said in a statement. "Business activity in the rest of the world remains on track."

Business appeared on track in October and most of November, Capellas said, during a conference call with analysts. Sales started to disappoint after the Thanksgiving weekend, he said.

"It was pretty hard to call this at the beginning of the quarter," Capellas told analysts.

Compaq's overall corporate business, which generates more than half of Compaq's revenue, has not shown any unexpected weakness, executives said.

"Corporate accounts are still rolling out projects," Capellas said, although he added Compaq is seeing increased price competition for corporate desktop PCs.

Some industry observers recently expressed concerns about the amount of Compaq product in the sales channel, given the soft market. The company on Tuesday said its inventories are in line with previous plans.

"We are taking the actions required to adjust to changing market conditions," Capellas said in a statement. "Channel inventories are currently at planned levels of four weeks for commercial products and just under seven weeks for consumer products. We will continue to balance growth and profitability as well as tightly manage expenses."

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