Compaq Computer Reports 21% Profit Drop
Compaq Computer Corp. reported Monday that its operating profit fell 21% in the first quarter, as it faced a slowdown in PC sales and aggressive pricing by its rivals that saw Compaq lose its top ranking to Dell Computer Corp.
The company also lowered its expectations for the second quarter.
Compaq Chief Financial Officer Jeff Clarke said the No. 2 personal computer maker was raising its job cuts to 7,000, or about 10%, of its total work force in an effort to streamline amid a downturn in demand for computers.
The second quarter will continue to be tough, the company warned. “Needless to say, this remains a very challenging market,” Compaq Chief Executive Michael Capellas said.
Capellas said Compaq will show flat sales growth in the second quarter as it changes the way it sells computers to better compete with Dell.
He added that the company will become more aggressive on pricing and that he sees profit “rebounding strongly” in the second half of the year.
For the second quarter, Capellas said, Compaq expects earnings of about 5 cents a share, well below the current consensus estimate of 17 cents. The reductions reflect Compaq’s reduced sales to retailers and distributors, rather than inventory write-offs.
Compaq shares traded at $19.78 on the Instinet electronic system, down from their close of $20.65, off 86 cents, on the New York Stock Exchange before the results were announced.
Compaq reported first-quarter profit of $200 million, or 12 cents a share, down from $252 million, or 14 cents, a year earlier. The latest results exclude a larger-than-expected one-time charge of $249 million, net investment income of $75 million and related tax effects. As recently as March 15, Compaq was expecting restructuring charges to total $125 million to $150 million.
The results hit the low end of analysts’ expectations, which ranged from 12 cents to 15 cents per share, with a consensus figure of 13 cents. Those estimates were already lowered when Compaq scaled back its outlook last month, saying investors should expect profit to be flat with last year.
Compaq’s sales fell 3% to $9.2 billion, meeting analysts’ hopes for about $9.14 billion in sales.
The company lost the No. 1 PC maker position to Dell in the first quarter, according to two top market research firms.
In the first quarter, Houston-based Compaq’s gross margin, as a percentage of revenue, was 22.7%, down slightly from a year ago. The decline was largely the result of pricing pressure in the United States, Compaq said.
