Compaq Issues Warning on Earnings
Sending the latest jolt through the technology industry, Compaq Computer Corp. on Friday warned that flat computer sales and price wars will wipe out its profit in the current quarter.
Compaq, the world’s largest maker of personal computers, said it had cut prices of its business desktops more steeply than expected due to intense competition for corporate customers.
Its warning came two days after Intel Corp. and Motorola Inc. said that their quarterly results also would fall below expectations and raised the possibility of a slowdown in the technology industry.
Compaq had been expected to report earnings of 35 cents a share, according to analysts surveyed by IBES International Inc. Sales were expected to be about $6.6 billion. Instead, Compaq said it expects about $4.81 billion in sales, the same as a year ago.
Compaq Chief Executive Eckhard Pfeiffer said the company has resorted to aggressive price cuts to trim bloated inventories. Like other PC makers, Houston-based Compaq is trying to reduce warehouse stocks dramatically so that it can bring new products to market faster and avoid the costs of cleaning out old inventories.
The disappointing outlook was released after the stock market closed. Compaq’s shares had gained 50 cents to close at $27.63 on the New York Stock Exchange.
The financial warning could have negative implications for Compaq’s agreement to purchase Digital Equipment Corp. Under the deal, Digital shareholders would get $30 a share in cash and 0.945 Compaq share for each Digital share. The deal was expected to be completed in April or May.
Compaq said it was viewing the April-June quarter with caution as well.
Compaq’s trouble in the market for business computers illuminates why Intel is having troubles meeting expectations. Intel, the largest maker of computer chips, said its slow sales were partly due to PC makers that were forced to sell from existing stocks of computers instead of buying chips for new computers.
However, industry analysts generally say Intel and Compaq are being hurt by inventory problems, rather than sagging demand industrywide.
Many of Compaq’s problems appear to be specific to the company, said Kevin Hause, an industry analyst with International Data Corp.
Compaq appears to be having more problems than competitors in paring its stocks of old computers because its management is attempting to do many things at once.
At the same time Compaq is trying to streamline its distribution process, the company is completing its merger with Digital. The deal was worth $9.6 billion when it was announced in January and is the technology industry’s largest merger ever.
