Compaq hits lowered targets amid slump

Feeling the brunt of a slow market for technology gear, the computer maker reports second-quarter earnings of 4 cents a share, down sharply from last year.

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Feeling the brunt of a slow market for technology gear, Compaq Computer reported second-quarter earnings and revenue Wednesday that were in line with lowered forecasts but represent a steep drop from a year ago.

The computer giant said that excluding certain charges it earned $67 million, or 4 cents a share, on revenue of $8.5 billion.

The company's operational results exclude a restructuring charge of $493 million. Including this charge, the company reported a net loss of $279 million, or 17 cents a share. In the same quarter last year, Compaq reported revenue of $10.1 billion and net income of $388 million, or 22 cents per diluted common share.

Earlier this month, Compaq warned that its sales would be about $8.4 billion, below its prior forecast, but that it expected to post earnings in line with Wall Street estimates of 4 cents a share. Compaq also said it would make 1,500 more job cuts, bringing to 8,500 the number of cuts it expects this year.

Compaq said it completed 5,100 of the job cuts, with 1,500 more cuts coming this month.

Compaq said Wednesday that it sees some stabilization in the United States, except for the consumer retail PC market, but said it sees continued uncertainty overseas. The company forecast it would generate 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.

Compaq executives said the company is looking at changes in how it sells PCs to consumers and will review each of the stores through which it sells computers.

"Our U.S. retail performance is unacceptable," Chief Financial Officer Jeff Clarke said in a conference call with financial analysts following the announcement. Clarke said the company lost $155 million in the business unit that includes PCs, compared with a loss of $82 million in the previous quarter

Clarke said the company expects the PC business to post a substantially narrower loss this quarter and return to profitability by the fourth quarter.

"In the short term, the market remains volatile and thus difficult to predict with much certainty," CEO Michael Capellas said in a statement.

Wit SoundView analyst Mark Specker said Compaq's results were largely in line with the company's recent forecast. Its outlook for revenue might be slightly below what some analysts were expecting, he said, but noted that the earnings projection was still as good as could be expected.

"We're looking at reasonably good (earnings) guidance," he said.

Specker added that Compaq's results and outlook should also provide some clues to the global market. "The other thing people are going to focus on is, is the U.S stabilizing fast enough to offset weakness in Europe and Asia?" Specker said.

"Frankly I think the U.S. has to actually get healthy or (at least) healthier," he said. "It can't just stabilize at poor levels."

Ahead of the report, Compaq shares nudged up 27 cents, or 1.9 percent, to $14.12.

On the positive side, Compaq said its global services business saw revenue up 7 percent compared with the second quarter of last year, with that business now accounting for 23 percent of sales, up from 21 percent a quarter ago.

However, the company's enterprise business, which sells servers and storage products, was down 21 percent from a year ago due to weaker demand, a tough pricing environment and attempts to cut inventory.

Revenue from the company's access business, which includes business and consumer PCs, was down 22 percent despite an 11 percent increase in unit sales of commercial PCs. Compaq also said it shipped 450,000 of its iPaq Pocket PC handhelds during the quarter, which represented 17 percent of total unit shipments of business-related devices.

"Losses increased in the consumer PC segment largely due to the rapid fall of consumer demand, resulting in the need to dramatically reduce prices in order to decrease inventory," Compaq said in its earnings report.

Compaq noted that it was able to meet Wall Street's estimates even while cutting inventory levels by nearly $1 billion, including more than $500 million of inventory in the hands of retailers and distributors. Compaq said it expects to reduce another $200 million in inventory from the distribution channel this quarter.

Capellas also reiterated the move by Compaq to sell its products as part of an overall package of technology, software, services and support.

"Customers are in fact changing the way they buy information technology," he said during the conference call. "They also want technology partners that can put the pieces together."