Earnings, Sales Boom at Compaq : Computers: Strategy of concentrating on low-cost production, price cutting are credited in firm’s achievement of bucking industry trend.
Compaq Computer Corp., bucking the trend in the super-competitive personal computer industry, said Wednesday that second-quarter net income more than tripled and sales nearly doubled from the year-ago period.
The results, which contrast sharply with the record loss posted by rival Apple Computer Inc. and the first-ever quarterly deficit forecast by Dell Computer Corp. last week, are slightly better than expected.
Compaq reported second-quarter earnings of $102 million, or $1.21 a share, compared to $29 million, or 35 cents, in last year’s second quarter. Sales were $1.63 billion, up from $827 million.
Analysts said the impressive earnings in the midst of a cutthroat price war bears out a controversial restructuring strategy that has transformed the company into a low-cost producer in just over a year.
“There used to be a big gap between top-tier vendors like Compaq and the second- and third-tier clone vendors,” said Todd Bakar, an analyst at Hambrecht & Quist in San Francisco. “Compaq has significantly closed that gap, and they’ve been able to take back a lot of market share.”
After replacing President J. Roderick Canion with former sales chief Eckhard Pfeiffer in October, 1991, the Houston firm rocked the computer industry the following spring by introducing three new product lines and slashing prices as much as 35%. As its competitors followed suit, personal computer prices plummeted nearly 50% in 18 months.
As the clone vendors, whose existence depends on their price advantage, are driven out of the market by low-cost mass producers, the bigger players are reclaiming market share. But Compaq, the firm that began the shake-up, has been in a better position than most to take advantage of the situation.
The company said Wednesday that its personal computer shipments in the second quarter soared 150% over the same period last year, while shipments for the industry as a whole climbed 25%. While the firm’s gross margins have contracted from nearly 43% in 1990, they appear to have stabilized, widening to 24.1% in the second quarter from 23% in the first--an indication that Compaq can turn a healthy profit even amid furious price cutting.
While computer industry stocks have been skidding amid the gloomy predictions and reports of losses, news of Compaq’s strong showing sent its shares up $3.38 on the New York Stock Exchange to close at $49 in heavy trading.
Eventually, Compaq hopes to displace Apple in the No. 2 spot in PC market share, behind IBM. Analysts said Apple and Dell must go through an evolution similar to Compaq’s before they can compete effectively.
