Compaq Computer is expected to return to double-digit revenue
growth for the first time in several quarters, another milestone in the
company's comeback efforts.
The Houston-based PC maker is expected to report earnings per share of 29 cents for the third quarter, according to a First Call/Thomson
survey of analysts' estimates. Revenue, meanwhile, will likely be above $10.1 billion,
according to many analysts, or more than 10 percent higher than the $9.2
billion in the third quarter last year. Compaq hasn't reported double-digit
revenue growth, excluding currency issues, since the second quarter of 1999.
Results like this will likely reinforce confidence in CEO Michael Capellas.
The former college linebacker has been running Compaq the way he played
football: focusing on short-term objectives to achieve long-term goals. That
management style, which contrasts sharply with the aim-high approach of
former Compaq CEO Eckhard Pfeiffer, is reviving the struggling computer
"The most important thing that's really happening over at Compaq the last
few quarters is Michael Capellas is setting goals he is achieving or
attaining ahead of time," said Technology
Business Research analyst Lindy Lesperance, who complimented what she
called the "let's be reasonable" management style.
Case in point: Compaq's commercial PC division, which returned to profitability during the second
quarter, ahead of schedule.
"My feeling is it's going to be a strong quarter for Compaq," Lesperance
said. "The commercial business is going to remain profitable, potentially
even improving as they continue to push the direct model."
Although the results will bring back confidence, Compaq, like other
companies, has not managed to dodge the PC flu. Sequential growth will be
slower than in normal years, and consumer sales remain a major question
Analyst projections on revenue growth vary widely, anywhere from around 9
percent to more than 16 percent. This contrasts starkly to the second
quarter, when a somewhat reinvigorated Compaq saw revenue go up 8 percent
year over year on $10.1 billion in sales.
Stock price from October 1999 to present.
Source: Prophet Finance
Lesperance predicted revenue growth in the 12 percent range, while Merrill
analyst Steve Fortuna earlier this month said he expected revenue
growth "of 16 percent, or $10.7 billion," and would be "looking for operating
margins there to expand to 7.2 percent from 5.6 percent."
Prudential Securities analyst Kimberly Alexy said in a report issued Monday
that "we continue to expect the company to meet (third-quarter)
expectations and remain optimistic into" the fourth quarter.
Gartner analyst Kevin Knox thinks
revenue growth is a tough call, setting a range of 9 percent to 14 percent.
"There are still some questions out there affecting revenue, and consumer is
the big one," he said. "And they've got some competition. HP has done well
at retail, and this has been a challenge for Compaq."
Analysts consistently expressed concerns over the health of Compaq's
consumer division, which in the second quarter accounted for about 16
percent of revenue. During that quarter, while revenue rose 32 percent year
over year, income declined by about a third. Operating margins of about 1.9
percent indicated larger problems, as the division grappled
with stiff competition from Hewlett-Packard and struggled to generate
non-hardware sales, such as services and software.
In September retail sales, for example, HP retook the sales lead from
Compaq, 38.2 percent market share to 32.6 percent, according to market
researcher PC Data.
More troubling are signs Compaq is losing ground in consumer notebooks after
years of dominance, said PC Data analyst Stephen Baker.
"The biggest danger is probably in the notebook space, with Sony and HP
coming on strong," he said. "Until the last six months, Compaq had huge
share lead and only Toshiba to beat up on."
Compaq's retail notebook share dropped to 37.5 percent in September, from 44
percent a month earlier, as Sony and HP--with 23 percent and 16.5 percent
share, respectively--gained ground.
Lesperance and Knox said they would be watching Compaq's device strategy, which it expanded on in August with MP3 and
Internet appliances and other devices. The company also is ramping up production of its iPaq Pocket PC
handheld to 100,000 units a month in the first quarter of next year due to
"The iPaq Pocket PC, they're doing a lot of volume in that, and they seem to
think their future lies in these small form factors," said IDC analyst Roger Kay.
Knox said the way Compaq crunches its iPaq numbers could greatly affect the
consumer group, depending on "where the iPaq handheld revenue gets
recorded." It had been counted with the commercial group but could be moved
The biggest change during the third quarter is expected to be a shift in
revenue mix, as a revived commercial PC division stands ready to surpass
enterprise sales. During the second quarter, 34 percent of Compaq's revenue
came from sales of large systems and 33 percent from commercial PCs.
Services made up about 13 percent of the mix.
But this does not mean poor performance from the business group. PC servers
are expected to show strong growth, with some uptake in high-end Himalaya
sales. More uncertain is storage and sales of Compaq's new AlphaServer GS,
or Wildfire, server. Compaq had forecast $1 billion in Wildfire sales this
"PC servers, notebooks and commercial PCs are where the revenue's going to
be this quarter," Knox said.
While Compaq shares appear stuck near the $30 range, financial analysts
remain hopeful of improvement, particularly going into the fourth quarter.
Credit Suisse First Boston analyst Kevin McCarthy set a 12-month target
price of $42.50 per share, and Robert Cihra at ING Barings set a price
target range of $40 to $45 per share.
Compaq shares closed Monday at $27.70, down 93 cents, or 3.25 percent.