Compaq sees 2Q loss, 3Q restructuring charge

Larry Dignan
4 min read

The bad news just keeps coming for Compaq Computer Corp. (NYSE: CPQ), which on Thursday announced plans to revamp its operations in the wake of a second quarter that may have seen a loss of up to 15 cents a share.

First Call was looking for earnings of 20 cents a share.

The world's largest PC maker cited pricing pressures for its problems. In addition, Compaq said it will take a "substantial" third quarter charge to pay for its restructuring, which analysts said will include a corporate alignment and inventory writedown. The moves will save about $2 billion in ongoing costs, the company said.

Compaq: Can it turn itself around?

"The operational issues that affected Compaq in the first quarter continued to influence our business this quarter," said Benjamin M. Rosen, chairman and acting CEO, in a statement. "Pricing pressures in the PC segment, inadequate revenue growth, and a non-competitive cost structure are the contributing factors to our expected shortfall."

The company plans its most extensive reorganization in eight years. "We are at the threshhold of a new Compaq," Rosen said during a Thursday morning news conference.

Ashok Kumar, an analyst with USB Piper Jaffray, said Compaq had to restructure to compete. Kumar said Compaq couldn't take advantage of strong consumer demand for sub-$1,000 PCs because of a bloated cost structure.

"You have to to view this as a step in the right direction, but it will be a slow recovery," said Kumar.

On the ropes

Compaq has been on the ropes this quarter. The company ousted then-CEO Eckhard Pfeiffer and financial chief Earl Mason in April. The company has been silent regarding the search for a new CEO.

Since the Pfeiffer and Mason departures, Compaq has continually had to reshuffle its management as several key employees left the company. Meanwhile, Dell Computer Corp. (Nasdaq: DELL), Hewlett-Packard (NYSE: HWP) and others have been busy eating Compaq's market share lead.

For the second quarter, Rosen said that both revenue and gross margins are expected to be flat to down sequentially from the first quarter, which wasn't too impressive to start with.

Compaq said operating expenses will increase from the first quarter due to goodwill amortization from Compaq's recent Internet acquisitions and the other long-term investments.

Another restructuring

To spark growth, Compaq also said it will revamp because it needs "significant structural changes" to compete. Compaq will have three global business groups focusing on enterprise products and services, personal computers, and consumer initiatives.

Rosen said the goal was to improve execution, speed decision-making, and "get closer to our customers." Compaq said each unit will have bottom-line accountability.

Compaq said Enrico Pesatori, senior vice president, will lead the enterprise group. Mike Winkler, senior vice president, will head up the personal computer unit. The consumer Group will continue to be headed by Mike Larson, senior vice president.

The company also said it will beef up marketing, its supply chain and e-commerce program. Compaq mentioned everything except adopting a more direct-sales approach such as the one Dell has. Analysts have been complaining Compaq needs to be more direct for some time.

The Enterprise Solutions and Services Group, created by combining its enterprise and services groups, is the largest change for the company. The new group will peddle Compaq NonStop eBusiness solutions, which include both products and services. Compaq said earlier this week that it would focus the NonStop eBusiness solutions at four vertical markets, including telecommunications and manufacturing.

Saw it coming

At least for one analyst, the Compaq problems in the second quarter were no surprise.

In a June 8 report, Kumar lowered his profit expectations to 3 cents a share and predicted Compaq would have to write down a vast amount of inventory.

"Compaq is currently sitting on about 8 weeks of aggregate inventory - 4 weeks internal and 4 weeks in the channel," said Kumar. "The channel is filled SKUs that are overpriced relative to street value and obsolete products that cannot be moved."

Kumar said Compaq's restructuring should wipe the slate clean in terms of excess inventory. "Restructuring is the umbrella term, but the company is also writing down inventory," he said. "This will make it easier for the new CEO."

But company executives at Thursday's press conference said restructuring charges will not include inventory writedowns. "There is no indication of abnormal seasonal inventory," Rosen said.

Kumar said that another downward revision of Compaq estimates could "pull the stock down to its volume at price support in the mid teens." Kumar doesn't see the stock moving until Compaq appoints a new CEO.

Compaq said expects to announce its second quarter results on July 28.

PC Week contributed to this report.