Compaq to Cut 7,000 Jobs in Turnaround Effort
Compaq Computer Corp. said Wednesday it would close several plants and lay off about 7,000 employees, or 10% of its work force--the first formal move by Chief Executive Michael Capellas in his less than a week as head of the country’s largest personal computer maker.
Capellas’ step seemed designed in part to convince Wall Street that he is serious about making tough calls in turning around the beleaguered company.
Capellas said the new cuts and a third-quarter charge of about $800 million will help “restore the company’s growth and financial performance.”
The company also reported a second-quarter loss of $184 million, or 10 cents a share, as had been expected by Wall Street. Piper Jaffray analyst Ashok Kumar estimated that Houston-based Compaq lost at least $70 million on personal computers.
Compaq shares rose 56 cents to $25.94 in regular NYSE trading, and was unchanged in after-hours trading.
“Compaq is a battleship. There’s not a way to turn it around on a dime,” said Kumar, who said he regarded the job cuts as an obvious first step. “He’s got to stop the bleeding. Then the key is to attract the people who have the vision.”
Compaq declined to say where the job cuts would take place. The company has manufacturing facilities in Houston, Scotland, Singapore, Brazil and elsewhere.
Hampered by a ferocious price-cutting in the personal computer market and by a costly, outdated system of selling its computers through retailers and middlemen, Compaq said its gross profit margin in the most recent three-month period dropped to 20.5% from 24.7% in the first quarter.
Revenue was $9.4 billion, the same as in the first quarter and up 17% from a year earlier.
The largest personal computer maker in the U.S., Compaq’s market share rose to 16.6% from 14.4% last year, according to International Data Corp.
Capellas said the job cuts would be completed by year-end and will be in addition to 2,000 cuts still planned from last year’s acquisition of Digital Equipment Corp.
Operating Expense Reduction Sought
He said the new job cuts are aimed at lopping off $2 billion in annual operating expenses.
“You should see operating expenses begin to come down by the fourth quarter. We are positioning for profitable growth . . . as we enter the year 2000,” Capellas said on a conference call with analysts and reporters.
He said he was comfortable with Wall Street expectations of 6 cents per share profit in the third quarter.
Analysts said Capellas’ initial moves were sorely needed as the company grapples with its problems. These include intense competition from Dell Computer in Texas and other firms that sell directly to consumers, eliminating costly accumulation of inventory at retail stores.
“If you look at their operating expenses, they are running twice as high as the industry benchmarks like Dell,” Kumar said. “They have eight weeks in inventory.”
That’s particularly damaging in the fast-moving world of high-tech, where languishing inventory risks becoming rapidly obsolete.
Capellas said the company is continuing to move its largest customers into a direct-sales relationship. From 15% of sales now, Compaq intends to move to 25% by year-end and 40% eventually, he said.
Tim Bajarin, an industry consultant at Creative Strategies, said that while some question whether Capellas has the charisma to lead such a large company out of red ink, Chairman Ben Rosen and the board couldn’t afford to keep looking beyond the three months they took. And an outsider would have had too much to learn before it became too late.
“Another six months and it could have been too far gone,” he said.
