Compaq Fails to Meet Analysts Expectations

The computer maker reports a third-quarter loss of $499 million and again lowers its forecasts for the remainder of the year.

Compaq Computer Corp., which warned three weeks ago that it would post a loss for the quarter, posted earnings Tuesday worse than analysts expected and again lowered its forecasts for the remainder of the year.

The Houston-based computer maker, which last month agreed to a buyout by Hewlett-Packard Co., blamed a drop in overall sales on fallout from the Sept. 11 terrorist attacks, continued decline in consumer and commercial demand, and aggressive pricing by competitors that forced the company to cut into its profit margins.

"It goes without saying that the third quarter was one of the most challenging quarters ever for Compaq and for our industry," Chairman and CEO Michael Capellas said in a conference call with analysts late Tuesday.

For the third quarter, Compaq reported a loss of $499 million, or 29 cents a share. Excluding one-time charges of $379 million, the company lost $120 million, or 7 cents a share, slightly worse than Wall Streets already lowered expectations of 6 cents a share, according to a survey of analysts by Thomson Financial/First Call.

Total revenue plunged to $7.48 billion, a drop of 33 percent from the same quarter last year, at which time the computer maker reported a profit of $557 million, or 31 cents per share.

Looking ahead to the fourth quarter, Compaq predicted a loss of 3 cents per share on revenues of $7.6 billion to $7.8 billion. Previously, Wall Street analysts were looking for Compaq to break even for the quarter, according to Thomson Financial/First Call.

While Compaq expects consumer PC sales to rise slightly due to holiday spending, Capellas said no such uptick was expected in corporate spending, which has remained at relatively low levels all year due to continued weakness in the U.S. economy.

"Its hardly news that IT budgets are down significantly this year," Capellas said, citing a U.S. survey that showed 40 percent of companies had reduced their IT spending since January. "While we do expect some increase in overall corporate IT spending next year, we do not anticipate dramatic changes, particularly in the first half of the year."

In one positive note, Compaq reported that revenue from its Global Services division rose 2 percent, to $1.9 billion, from a year ago. In June, Capellas said that the companys future would hinge on the success of its services unit, and yesterday he touted its growth as the "high point of our business performance this quarter."

In addition to forecasting continued growth in services revenue, Capellas was also optimistic that the company would see increasing sales of its high-end Himalaya servers, which are used to power many of the worlds financial markets, as well as storage devices. Both segments are expected to benefit from corporations heightened concerns about improving infrastructure security and stability.

Sales of what the company calls Industry Standard Servers, which comprise Intel-based systems, were down 16 percent from the previous quarter, with sales most depressed for larger four-way and eight-way systems, according to Compaq executives. Nevertheless, they said, the company gained market share compared with the previous quarter.

While forecasting future market conditions remains particularly hazardous given recent events, Capellas said he was optimistic the industrys slump, which began last fall, would eventually come to an end by the middle of next year.

"Right now, our most likely scenario is for the economy and IT demand to begin to improve in the second half of 2002," he said. But, he cautioned, the timing of the rebounds will likely vary greatly around the world and by market segment. "We will see different patterns in different regions around the world as well as in different vertical industries."