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Compaq posts 2Q loss, cuts up to 8,000 jobs

Up to 8,000 people will suffer Eckhard Pfeiffer's fate in the wake of Compaq's bloodiest quarterly financial performance in years.

In second quarter results released after market close Wednesday, the world's largest maker of PCs posted a net loss of $184 million, or 10 cents per share, roughly in line with analyst estimates.

The deficit came despite a 17 percent gain in second revenues, to $9.4 billion. But that sales growth was "inadequate", said Michael Capellas, recently appointed to succeed the ousted Pfeiffer as president and CEO.

Gross margins fell to 20.5 percent from 24.7 percent as Compaq dealt with the PC industry's ongoing price war. Also hurting margins: rising warranty costs several discontinued PC products; penalties related to some long-term purchasing contracts; and costs associated with programs no longer extant.

At the same time, operating costs increased more than 13 percent as Compaq boosted spending on promotional events and advertising. The company also had to pay for continued goodwill amortization related to AltaVista, incremental allowances for accounts receivable, and Y2K preparation, much of which has been completed.

To streamline operations, Compaq will take a third quarter charge ranging between $700 million and $900 million, to fire as many as 8,000 employees. Last month, Compaq warned of a large third quarter charge to pay for cost-cutting moves expected to save $2 billion a year. "We're very comfortable with the consensus estimates on the Street right now. We feel they're in line and that those estimates will fall in place," Capellas said during a conference call with analysts.

During the second quarter, revenues from large corporate customers rose 11 percent year-year-, with server and storage products leading the way. Commercial PC sales increased 19 percent oer the same period.

Compaq boosted its share of the U.S. market to 16.6 percent from 14.4 percent, according to International Data Corp. Worldwide, Compaq's market share increased to 14.6 percent. The company's commercial channel inventory now averaged 3.5 weeks, compared to 3.9 weeks in the first quarter.

Shares of Compaq rose 9/16 to 25 15/16 in regular trading prior to the quarterly report. Of 36 analysts polled by Zack's Investment Research, 19 maintain the equivalent of a "hold" rating on Compaq, 11 have the stock as a "moderate buy", and six recommend it as a "strong buy".