Perfect Storm Batters Compaq

Compaq warns that its quarterly earnings will fall well short of expectations, claiming the fallout of the Sept. 11 terrorist attacks and other factors produced 'the perfect storm.'

Compaq Computer Corp. warned Monday that its quarterly earnings will fall far short of expectations, saying that fallout from the Sept. 11 terrorist attacks and other factors produced "the perfect storm" that battered its business.

For the third quarter ended Sept. 30, the worlds second largest PC vendor expects revenue to be $7.4 billion to $7.5 billion, a decline of 12 percent from the previous quarter, resulting in a loss of 5 to 7 cents per share.

The numbers are well below the companys previous projections of revenues totaling between $8 billion and $8.4 billion, and earnings of 7 cents to 9 cents per share.

"The events of Sept. 11 disproportionately affected the current quarter," said Compaq Chairman Michael Capellas. "Market demand slowed, and transportation and logistics were disrupted."

Compaq estimated it lost $700 million in business in the week following the attacks.

Several other factors also undermined the quarter, Compaq executives said during a conference call with market analysts late Monday.

On Sept. 4, Houston-based Compaq disclosed that it agreed to a buyout by Hewlett-Packard Co., in a stock-based merger valued at $25 billion at the time. The announcement stunned Wall Street, sending the companys stock tumbling, and resulted in a "temporary pause for customers," who held off on purchases, said Jeff Clarke, Compaqs chief financial officer.

In addition, Compaqs business operations were disrupted when Taiwan was hit by Typhoon Nari the week of Sept. 17, which delayed shipments of key computer components to Compaq.

The confluence of events created "the perfect storm," Capellas said, pushing the company into the red for the quarter.

Despite the poor showing, Capellas said Compaq continues to make progress with its efforts to reduce operating costs and build its services business.

"Although we are disappointed with these results," he said, "we have made great progress in executing our cost control and go-to-market plans and are confident that these operational improvements, as well as our continued focus on services, will benefit us competitively in the long run."

But such optimism is not shared by many industry analysts, who not only remain skeptical of the companys ability to weather the current downturn, but who contend Compaq will be further hampered by customers uncertainty over the proposed takeover by HP, of Palo Alto, Calif.

"Although mainly the victim of macro market issues, we nevertheless believe CPQs momentum has been irreversibly impacted by its planned acquisition by Hewlett-Packard," said market analyst Rob Cihra, of ABN Amro, in New York. "We think Compaq is now hurting even more than most, while its outlook has been ball-and-chained."

Other analysts agree that the company faces a difficult road ahead.

While Compaqs warning was widely anticipated, "the shortfall was worse than expected," said Dan Niles, a market analyst with Lehman Brothers, in San Francisco.

"Compaq also believes that any improvement in revenues in Q4 is more likely to be driven by the corporate and not consumer segment," Niles said. "This is obviously a negative omen for overall Q4 retail sales. On the corporate front, many CIOs and IT managers seem to be waiting till next year to resume spending."