Compaq to Miss Earnings Targets, Cut 5,000 Jobs

Compaq Computer Corp., the world’s biggest personal computer maker, warned that its first-quarter earnings will fall short of expectations because of a price war and a softening U.S. economy, and said it will cut about 5,000 jobs, or 7% of its work force.

Compaq Chief Executive Michael Capellas said shaky consumer confidence had spread to the corporations that are his biggest customers.

He said the retrenchment will prepare the company for continuing U.S. problems and a likely economic decline in Europe.

“We’re doing the things we need to do assuming this lasts a bit,” Capellas said in a hastily arranged conference call with analysts.

Compaq said that it will take a restructuring charge of $125 million to $150 million in the first quarter and that the job cuts will shave the company’s annual operating expenses by $500 million to $600 million.

Compaq lowered its earnings forecast for the quarter to 12 to 14 cents a share, down from 16 cents a year earlier. Analysts had expected 18 cents, according to First Call/Thomson Financial.

The company also said its quarterly sales will fall to $9 billion to $9.2 billion, down from last year’s $9.5 billion.

Compaq shares rose 15 cents to $18.50 in regular New York Stock Exchange trading. The stock inched up to $18.61 in after-hours trading, after the news was announced.

The PC maker is the latest technology bellwether to warn of weaker results amid slumping prices and sluggish demand.

“There’s five [companies] in the market--Compaq, Dell, [Hewlett-Packard], IBM and Gateway--all pricing aggressively on PCs and looking for something else like servers or storage to pick up gross margins,” said Brett Miller, analyst with A.G. Edwards & Sons. “There are five people selling a commodity product.”

Compaq has been focusing on powerful business computers, storage equipment and small devices to maintain margins as the PC market cools.

The sluggishness has moved upstream, and both demand and prices are hurting for computer servers sold to North American businesses, Capellas said.

The job cuts follow similar moves by Dell, Gateway and other technology companies ranging from networking giant Cisco Systems Inc. to No. 2 mobile phone maker Motorola Inc.

“We see continued weakness in the U.S. economy and resultant pricing pressures,” Capellas said. “Clearly, we are operating in a challenging environment.”

Houston-based Compaq also named a new chief financial officer, Jeff Clarke, who had been vice president of finance and strategy for sales and services. Compaq’s former CFO, Jesse Greene, was named senior vice president of strategic planning.

Compaq also said it will merge the company’s commercial and consumer PC operations into a single group as it becomes more aggressive in increasing its market share of the overall information technology market.

Capellas said he expected gross profit margins to continue to deteriorate.

“The whole goal we are setting out is to be aggressive on expenses to offset that margin pressure,” he said.

Some of the weakness in Compaq’s U.S. markets is likely to extend to other areas, Capellas said.

“We so far in the quarter have not seen particular degradation of order rates or activities in Europe on the commercial side, and we’ve seen the high-end [equipment] in Japan has remained relatively stable,” he said.

“If one is conservative, [it is likely] there will be some extension of weakness we see in the U.S. in Europe,” he said. “My personal belief is that it won’t be nearly as deep, but we can’t believe we’ll be unaffected.”

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Reuters was used in compiling this report.