Compaq Scrambles to Cut Expenses

By eweek  |  Posted 2001-07-16

Compaq Computer Corp.s announcement last week that it was lowering revenue estimates and cutting more jobs was the latest example of a company desperate to slash operating expenses.

Fighting a softening economy and a price war in the PC industry, the Houston computer maker announced it will miss already-lowered estimates for the quarter and will lay off 1,500 more workers on top of the 7,000 already announced.

Company executives said revenue for the just-completed quarter would fall short by about $600 million. Despite missing revenue projections, Compaq said it expects to post earnings of 4 cents per share, in line with current Wall Street projections. The company will officially report its earnings July 25.

Earlier this month, Compaq, which has worked to streamline its product lines, said it is halting production of its high-end Alpha processor, instead embracing Intel Corp.s Itanium chips. But industry observers said the move is another in a series of bad ones by the company.

"I think theyre trying to save money the wrong way," said David Dachtera, an independent contractor with DJE Systems, in Elmhurst, Ill., who criticized Compaqs decision to abandon the Alpha processor. "The problems with Compaq are not simple ... and one problem is Compaq is always going to be seen in the marketplace as a PC company. Theyve never really been able to do anything to shed that image or do anything positive to make that happen for them."

In hopes of boosting earnings, CEO and Chairman Michael Capellas told employees in an internal memo that Compaq, which draws most of its revenue from hardware sales, will increasingly focus on building up its services and software businesses. But with no rebound in site, the company will press for more spending cuts.

Compaq will take a $490 million charge to cover expenses tied to the job cuts and streamlining. In all, Compaq will cut 8,500 jobs this year.

Facing increased pressure from rival Dell Computer Corp., Compaq is visibly struggling. One problem, said analyst Andy Neff, of The Bear Stearns Cos. Inc., in New York, is that Compaq is working to stem losses rather than build a solid foundation for future growth.

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