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Research firm says Compaq back on track

Bloodied and battered, the company gets some good news with a strong endorsement from market researcher Gartner Group.

Bloodied and battered Compaq Computer got some good news today: a strong endorsement from market researcher Gartner Group.

The Stamford, Conn.-based firm stated in a report that Compaq appears to have realigned its essential business operations, adding that corporate customers can once again feel comfortable about working with the company on major efforts.

But Gartner Group also warned that Compaq has a long way to go before turning around its money-losing PC operation. Lingering problems with integrating two acquisitions, Digital Equipment and Tandem, are still having an effect.

"I think things are finally looking pretty good for Compaq," said Gartner Group analyst Ken Knox. "They finally articulated their strategy, and (new CEO Michael) Capellas has done a pretty good job taking over the leadership of Compaq."

It's been a rough year for the company. A year ago, financial analysts warned that first-quarter earnings would be half of expectations. That led to the ouster of then-CEO Eckhard Pfeiffer last April and opened the door for his untested replacement, Capellas.

In the report, "Compaq's PC Business: Going Forward or Going Nowhere?" Gartner Group portrayed the company as a once top-tier PC maker toppled by arrogance but now mending its ways.

Much of the credit goes to Capellas and his hands-on approach with customers and willingness to listen to them.

"His perception of the market is pretty good, better than Eckhard (Pfeiffer)," Knox said. "Eckhard1s approach was more, 'Do it my way, or don't do it with us at all.' Capellas is more open and listening to what the end users are saying."

Knox praised Capellas' decision to increase the number of systems it sells directly to customers, which means relying less on dealers. Compaq pledged to take 40 percent of its overall business and 60 percent of commercial PC sales direct this year.

While direct sales typically are more cost effective--as direct manufacturers produce and distribute systems more cheaply than those using dealers--the essential benefit comes from the hands-on customer relationship, according to Gartner Group.

"Dell has a couple of advantages that people often overlook: They have a level of customer intimacy and accountability that none of the indirect manufacturers have," Knox said. "Dell knows its customers. For Compaq, (Hewlett-Packard) and IBM, the (dealers) know their customers."

On the design side, Knox pointed to new Armada notebooks introduced last July and the legacy-reduced iPaq PC, which Compaq started shipping in January.

Compaq used an accelerated development schedule, putting iPaq together in 100 days vs. the more typical 18 months. That allowed the PC maker to leap ahead of competitors Dell, HP and IBM with their own simpler PC that emphasizes USB (universal serial bus) over legacy parallel and serial ports. HP and IBM, respectively, unveiled e-Vectra and NetVista, which will compete with iPaq.

Compaq needs some good news after its commercial PC operation, which accounts for 31 percent of revenues, lost money for nearly a year. The division lost $79 million in the fourth quarter, an improvement over $169 million and $225 million losses, respectively, in the second and third quarters.

The Houston-based PC maker last year also ceded the top spot in U.S. PC sales to archrival Dell Computer, according to Gartner Group subsidiary Dataquest. Dell in the fourth quarter held a narrow lead over Compaq, 16.2 percent to 15.8 percent. HP followed with 10.2 percent market share.

Gartner Group predicted that with the introduction of iPaq and increased focus on providing customers with software tools they need, Compaq this year will reclaim its PC sales leadership position.

"We expect Compaq to grow and regain its leadership in the PC market," Knox said. "We think our clients need not be concerned dealing with Compaq, and we think they're viable for at least the next five years as a leading supplier."

Still, Compaq has some rough spots to work out, particularly in the enterprise and services division, which accounts for more than 50 percent of revenues.

Compaq offers too many kinds of servers with no clear strategy for how the pieces fit together, Gartner Group concluded. Overlap among ProLiant PC servers and AlphaServers is in some ways confusing customers. Recently Compaq licensed 32-processor servers from Unisys as it prepares a new multiprocessor Alpha server, code-named Wildfire, for May delivery. Similar performance and other features can confuse customers and undermine their confidence in Compaq.

"On the enterprise side, there needs to be crisper messaging and a clearer strategy," Knox said.