Compaq Says to Expect Lower Results, Price Cuts
Compaq Computer Corp. roiled the industry Friday, warning of poorer financial results than expected and announcing cuts likely to heat up an industry price war.
A disappointed Wall Street sent Compaq shares tumbling, along with those of a number of other high-technology companies. Compaq shares dropped $8.875 to $41.75, or 18%, in New York Stock Exchange trading. Shares in Gateway 2000 and Dell fell more than 10%; those of Apple, Hewlett-Packard, IBM and AST dropped less dramatically.
Compaq, the leading maker of PCs, warned that it will post lower-than-expected first-quarter financial results--another sign that demand for personal computers is slowing.
The company also said it would cut prices to meet an internal sales growth target that exceeds expectations for the rest of the PC industry.
Although the move hurts Compaq’s short-term performance, it could be ominous for competitors, particularly those with smaller profit margins.
“This provides us with the opportunity to be the leader in setting price and setting position,” said Daryl White, chief financial officer of Compaq. “To the extent that hurts our competition, well, that’s what it’s designed to do.”
Meanwhile, Intuit Inc., which makes PC software for home finance and tax preparation, cautioned that profits for the remainder of the year will be squeezed because of higher-than-expected start-up costs for a new online banking service and slow sales of its flagship product, Quicken, the dominant PC software package for home finance.
For the quarter ended Jan. 31, Intuit posted a profit of $39.2 million, or 82 cents a share, on revenue of $221.7 million--a 37% increase over the same period last year--but said that profits would change little from 1995 levels as it struggles to establish its electronic banking system.
Intuit shares plunged $16.25 to $50.50 in Nasdaq trading.
Compaq’s troubles mirror those of the industry as a whole. After setting a torrid pace in 1994 as many affluent consumers purchased their first PCs, sales slowed last year.
PC sales grew a whopping 40% in 1994, according to market researchers, with many of those sales coming during the holiday season. Anticipating another year of robust holiday sales and concerned that they would find themselves unable to meet demand, manufacturers built large inventories of machines in 1995.
But a big Christmas never materialized: PC sales slowed to between 20% and 25%, according to Seymour Merrin, a market researcher who tracks PC retail sales, leaving manufacturers with warehouses filled with unsold computers. Market researchers project that sales will grow 18% to 20% in 1996.
In hope of jump-starting sales, Compaq said it will announce price cuts Monday. Apple Computer, Packard Bell and Hewlett-Packard have already slashed prices to clear out inventory.
“It’s really a mutual suffering,” said Kevin McCarthy, analyst at NatWest Securities in New York. “Profitability suffers in the short term, but when they come out of it, there will be fewer companies and they will be in position to perform more profitably.”
At greatest risk are Dell Computer Corp. and Gateway 2000 Inc., which sell directly to businesses and already have slimmer margins than Compaq.
Compaq’s sales to business customers have also slowed. To offset the razor-thin profit margins in the home PC market, Compaq has placed an increasing emphasis on servers, more powerful computers that orchestrate networks of PCs. But competition in that market has intensified with large companies such as Hewlett-Packard and Digital Equipment making inroads with servers.
