Compaq sees shortfall, plans reorg

Compaq says it expects to report a second quarter loss and announces major organizational changes.

Brooke Crothers Former CNET contributor
Brooke Crothers writes about mobile computer systems, including laptops, tablets, smartphones: how they define the computing experience and the hardware that makes them tick. He has served as an editor at large at CNET News and a contributing reporter to The New York Times' Bits and Technology sections. His interest in things small began when living in Tokyo in a very small apartment for a very long time.
Brooke Crothers
5 min read
Mired by slow sales and organizational disarray, Compaq said it expects to report a second-quarter loss, take a substantial restructuring charge in the third quarter, and begin to lay off layers of management in a new organizational plan unveiled today.

Compaq said it expects a loss for the second quarter of up to 15 cents per share. The company was expected to report a gain of 20 cents per share, according to First Call. Compaq expects a substantial third-quarter restructuring charge to eliminate up to $2 billion in operating expenses, which will include layoffs.

"The operational issues that affected Compaq in the first quarter continued to influence our business this quarter," said Benjamin M. Rosen, chairman and acting chief executive officer, in a statement.

"Pricing pressures in the PC segment, inadequate revenue growth, and a noncompetitive cost structure are the contributing factors to our expected shortfall," he added.

Today's announcements are the latest in a string of bad news for Compaq in 1999. The company has reported slow sales since the beginning of the year at a time when other major PC makers have reported strong growth. For example, International Data Corp. reported that Dell Computer became the No. 1 seller of computers to small businesses--one of the hottest markets--in the first quarter of 1999 while Compaq slipped to No. 3 from the top spot a year ago. Moreover, Dell and Hewlett-Packard are gaining on Compaq in the overall U.S. PC market, according to GartnerGroup Dataquest.

The bleak revenue picture, combined with major shareholder anger over other issues, led Compaq in April to terminate former chief executive Eckhard Pfeiffer. Since then, many other executives have also left. Meanwhile, the company is still seeking a CEO.

Merrill Lynch cut its rating on the computer maker today to long-term accumulate from buy, a spokesman for the investment bank said, according to Reuters.

Rosen also said that both revenues and gross margins are expected to be flat to down sequentially from the first quarter. Operating expenses will increase from the first quarter as a result of Compaq's recent Internet acquisitions and the expenditures that are needed to support the company's longer-term goals.

"I don't think the restructuring is planned ahead of time. They have a problem; they have to fix it," said David Wu, an equities analyst at ABN AMRO. "Their costs are too high, and their revenues are too low."

Other analysts agree. "Given that set of perimeters, the loss seems larger than I would think is reasonable because it would imply a fairly dramatic upward extension in expenses, said Cowen & Company analyst Richard Chu.

"Pricing pressure in the PC segment, low growth...are standards in the PC landscape all the time. So why is it hitting compaq more?," asked Chu.

But Michael Capellas, acting chief operating officer, said that Compaq will continue to eliminate "layers of redundancy. We'll have some element of [work] force reduction" in the future, he said in a conference call.

Both Capellas and Rosen also stated emphatically that ecommerce is critical for Compaq's future--though this is not a new development, as chief executives at all the major computer makers are repeating this mantra at every opportunity.

Three global business groups
Compaq also announced a reorganization plan. "We have determined that significant structural changes are required to enable this company to realize its enormous potential and secure its position as the preferred information technology partner for global customers," Rosen said.

Rosen said that the most fundamental change will be the establishment of three global business groups--Enterprise Solutions and Services, Personal Computer, and Consumer--each with a separate, market-driven, profit-and-loss accountability.

The move comes as a number of executives have left the company--with Hans Gutsch, senior vice president of human resources, yesterday becoming the latest to go. Gutsch was a high-ranking executive and confidant of former CEO Eckhard Pfeiffer, who was forced out earlier this year amid slumping sales and shareholder dissatisfaction.

Company executives said Gutsch's retiriement was effective immediately.

The departure will likely not be viewed as a surprise as the executive was closely associated with Pfeiffer. Others close to the former CEO, such as former CFO Earl Mason and senior vice president John Rose, have already left.

Earlier this month, Compaq named Capellas as its acting chief operating officer and Enrico Pesatori to head up the crucial enterprise computing group. (See related story)

Meanwhile, the company continues to search for a CEO to replace Pfeiffer.

The organizational changes include the formation of the Enterprise Solutions and Services Group, headed by Pesatori. This is being accomplished by combining the company's Enterprise Computing Group and Compaq Services. It will be responsible for corporate enterprise eBusiness products and services.

The Personal Computer Group will continue to be led by Mike Winkler, senior vice president and group general manager and the Consumer Group will continue to be headed by Mike Larson, senior vice president and group general manager.

Focus on specific markets
Capellas said the realignment is centered on being more focused on specific markets. He cited the consumer group as a positive example of a group that is currently "aligned top to bottom" which allows Compaq to bring products to market more quickly and efficiently. He said other groups have suffered from overly horizontal marketing.

But some analysts don't really see any big changes. "I don't feel very satisfied. There's all this arm waving but what's actually different here," said Roger Kay, an analyst at IDC. He said that Rosen and the other executives sounded ominously like the Compaq of old. Like before, "you can never really see what the actual changes are," he added.

Kay says that apparently it boils down to segmenting the company into three different product groups but with one large, overarching sales group. In each sales group, there will be high level specialists.

Other changes Compaq cited are:

 Creation of a global Sales and Marketing group--led by Peter Blackmore, senior vice president, sales and marketing--with responsibility for sales processes across all business group lines.
 Establishment of a dedicated organization to manage all of Compaq's eCommerce activities.
 Continued building of a world-class supply chain with end-to-end alignment from demand management to delivery.
 Creation of a customer advocacy organization, combining Compaq's quality and customer satisfaction organization with its customer advocacy initiatives.

Because of the realignment, Compaq expects to take a substantial restructuring charge in the third quarter. "Once fully executed, the realignment plan is designed to eliminate $2 billion in ongoing operating costs," said COO Capellas.

News.com's Sandeep Junnarkar, Dawn Kawamoto, and Michael Kanellos contributed to this report.