Compaq details its direct-sales hopes

The PC maker tells financial analysts that it plans to start selling more of its computers directly to customers, and this time the company says it means it.

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Compaq Computer told financial analysts today that it plans to start selling more of its computers directly to customers, and this time the company says it means it.

Speaking to financial analysts in Houston today, Compaq exexutives predicted that approximately 60 percent of its PCs for the commercial market in North America will be sold directly to customers--rather than through distributors or dealers--by the end of the year. Currently, 85 percent of its PCs go through distribution. Overall, Compaq wants to see 40 percent of its systems sold directly.

The move to sell computers in the same way as rival Dell Computer does should cut costs and will be helped by the purchase late last year of Inacom's distribution assets. Still, analysts who have heard Compaq talk about direct sales before say that the goal could be tough to meet.

"Anyone who sells indirect loses money today," Compaq senior vice president Michael Winkler said at the meeting, according to Bloomberg. "Anyone who sells direct makes money."

Compaq executives briefed financial analysts for about four hours today, setting the PC maker's direct strategy and a goal of about 15 percent growth for 2000. Compaq also promised it would bring its commercial PC division to profitability by the second half of the year.

Compaq on Tuesday revealed that its commercial PC division, which made up about 31 percent of revenue, lost $79 million during the fourth quarter. That compares to a wider loss of $157 million for the third quarter, in which Technology Business Research analyst Lindy Lesperance estimated Compaq lost more than 6 percent on every commercial PC it sold.

Winkler said the indirect sales method takes about 15 percent revenue from each machine vs. 2 percent for direct.

The company is also betting big on iPaq, its simplified business PC that started shipping this week.

"It is a dogfight, and iPaq will certainly help us in that regard both as an innovative product and increased margins," Winkler told financial analysts Tuesday. "Portables are becoming an increasing portion of our mix, which bring in increased margins. And as we increase the direct content of our business, that also increases our margins."

Today's news had little effect on Compaq shares in late-day trading. At 1 p.m. PST, the close of regular trading, Compaq's stock was down 2.68 percent to $27.79.

Merrill Lynch analyst Steven Fortuna in a short written statement expressed some concern that Compaq could achieve its direct goals. Fortuna reiterated his near-term "neutral" and long-term "accumulate" on Compaq stock.

"We do not think this is achievable," Fortuna wrote. "In our view, (Compaq) is being overly aggressive in how fast it can take its business from indirect to direct."

Jeff Matthews, general partner in Ram Partners, a Greenwich, Conn., investment firm, said he was not surprised by Compaq's posturing.

"Compaq's going direct is as inevitable as the sun rising tomorrow," he said.

Margins have greatly concerned financial analysts. Ashok Kumar, an analyst with US Bancorp Piper Jaffray, said Compaq must return its operating margins back to the 8 percent range from about 4 percent today.

Gross margins during the fourth quarter declined about 1.1 points to 22.2 percent.

"Our $43.3 billion revenue estimate for 2000 is about 13 percent growth vs. (the) company goal of 15 percent," wrote James Poyner, an analyst at C.E. Unterberg, Towbin, in a report he issued on the analyst meeting. He warned that his 18 cents a share estimate for the first quarter has about a penny risk because of an anticipated "$50 million to $60 million" charge.

Chief executive Michael Capellas on Tuesday told financial analysts that Compaq expects in the first quarter to take a $60 million to $75 million hit associated with ending Windows 2000 development on the Alpha processor. The purchase of facilities from Inacom would also affect the quarter's results, but Capellas would not say by how much.

Besides unveiling its direct strategy and efforts to revive its struggling commercial PC unit, Compaq touted its next-generation Alpha server, code-named Wildfire. Compaq told financial analysts it expects to realize about $1 billion in revenue from Wildfire this year.

"During our private conversations with them we learned they have about 104 units in backlog, which translates to $150 million in revenue as a significant jump-start to the effort," Poyner wrote.

Compaq expects about two-thirds of Wildfire servers, which are expected to begin shipping next month, to go to existing customers.

Bloomberg contributed to this report.