Fundamental changes in the personal computer business have finally caught up with once-high-flying Compaq Computer, which said Wednesday that second-quarter earnings would be less than one-fourth of what they were a year ago as a result of a weak economy and problems among computer retailers.
The unexpected announcement sent the Houston-based company's stock down a stunning 27% and raised disturbing questions about the firm's long-term positioning in the volatile PC industry. Analysts agreed that some of Compaq's problems were attributable to broad trends affecting the entire industry, but added that the firm also faced basic pricing, distribution and product-differentiation problems that would not be easy to solve.
Compaq's stock dropped $13.25 per share to $36 in heavy trading on the New York Stock Exchange, and other computer-related issues
such as Apple Computer and Intel followed it down. The trading activity was reminiscent of May 1, when an Apple announcement that earnings would be off sent a broad swath of tech stocks tumbling.
Compaq said earnings per share for the quarter ended June 30 will be less than 25 cents, far below the $1.18 per share it earned a year ago. Revenues will be down more than 15% from the $862 million registered in the year-ago quarter.
Compaq President and Chief Executive Joseph R. (Rod) Canion said in a statement that consolidation among computer retailers had created an "excess inventory position" that would cause delays in orders for new products. Sales were also being hurt by the soft U.S. PC market and a strong dollar, which has hurt overseas sales, Canion said.
The magnitude of the earnings drop clearly caught investors by surprise, and the dramatic stock selloff reflected investor fears that Compaq's niche--the premium-price segment of the International Business Machines-compatible PC market--may be vanishing. Compaq cut prices as much as 34% earlier this year in response to intensifying competitive pressures from cut-rate clone-makers such as Dell Computer and AST Research.
"The old-line premium pricing strategy just doesn't cut it any more," said Bruce Stephen, an analyst with International Data Corp., noting that Apple had also been forced to pursue a low-price strategy. "The 'commoditization' of the PC business has spread, covering much more of the market than it used to."
Compaq must also find a way to deal with a related shift in the way PCs are sold. The company has spent years cultivating the loyalty of computer dealers, but those dealers are facing severe problems as more and more customers opt for cheaper and more convenient mail order and mass-merchandising outlets.
Businessland, the nation's largest computer dealer and long a major vendor of Compaq machines, said Tuesday that it may have to file Chapter 11 bankruptcy if it cannot find an outside investor. And several large chains--including Nynex and Computerland, Inacomp and Valcom, and Compucom and Computer Factory--have recently merged in an effort to avoid a similar fate.
Bruce Lupatkin, an analyst at Hambrecht & Quist, said Compaq does not appear to have addressed this difficulty. "(Compaq's) channel is losing market share to alternative distribution methodologies," Lupatkin said. "Anyone who uses a reseller channel is feeling the effects of these changes."
The problem of excess inventory in the dealer channel is a novel one in the computer business, and Steve Ossad at Montgomery Securities noted that no one in the industry appeared to be aware of it. Yet shipments of computer chips remain strong, indicating that computer manufacturers may be starting to encounter problems in calibrating production and demand, an issue that has long plagued auto makers and others.
Analysts said that over the long term, Compaq will try to pull itself out of the commodity PC arena with new high-end products, and the new Advanced Computing Environment initiative--an effort by Compaq and about 30 other technology firms to develop new advanced desktop computing standard--promises to give the company an entry in the fast-growing market for high-powered desktop workstations. But in the short term, the Compaq's problems are expected to continue, especially if the economy fails to rebound strongly.
"Everyone (in the computer business) was misled by the fourth quarter," said Richard Shaffer, principal of Technologic Partners in New York. "Everyone was forecasting doom and gloom, so when it came through fairly reasonably, people were seeing the end of the recession. Then the first quarter looked pretty good, at least for the first six weeks. Now, the softness in the economy is finally catching up."
THE TECH STOCK DEBACLE How key high-tech stocks plunged Wednesday, and how far they have fallen from their 52-week high prices.
52-week Wed. close Pct Stock high-low and change Wed. Compaq 74 1/4-35 1/2 36, -13 1/4 -27% Conner Peripherals 31 1/4-14 5/8 20 1/4, -2 1/2 -11% AST Research 32 3/4-7 3/8 22 1/8, -2 5/8 -11% Apple Computer 73 1/4-24 1/4 50 1/2, -3 -6% Dell Computer 30 5/8-8 1/4 21 3/8, -1 7/8 -8% IBM 139 3/4-96 1/4 102 3/4, -3 1/4 -3% Texas Instruments 47 5/8-22 1/2 37 7/8, -1 1/8 -3% Microsoft 117 1/2-50 3/4 98, -3 1/4 -3% Intel Corp. 55 1/4-28 49 1/4, -4 -8% Sun Microsystems 38 5/8-15 34 7/8, -2 -5%
. decline: Stock From peak Compaq -52% Conner Peripherals -35% AST Research -32% Apple Computer -31% Dell Computer -30% IBM -26% Texas Instruments -20% Microsoft -17% Intel Corp. -11% Sun Microsystems -10%
DOW TUMBLES 21.47
A selloff in high-tech stocks pushed the market lower.