| BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE | ||||||||
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| NEWS: ANALYSIS & COMMENTARY
For Compaq, A Different Kind of Y2K Problem Revenues of $50 billion by 2000? Wall Street analysts say no way Eckhard Pfeiffer isn't planning to let little things like price wars or weak demand for his core products slow him down. On Apr. 9, the Compaq Corp. chief executive stunned Wall Street with a disastrous announcement: First-quarter profits for Compaq Computer Corp. (CPQ) will be half as much as investors had been expecting, largely because margins are being squeezed by falling prices and because business customers have eased up on orders. But Pfeiffer remains bullish and predicts Compaq will reach $50 billion in revenues by 2000. ''That doesn't throw us off,'' he insists. Wall Street is skeptical. ''That looks really remote unless they make another acquisition,'' says Warburg Dillon Read analyst Charles R. Wolf, who has lowered his 1999 revenue forecast for Compaq from $41.3 billion to $40.5 billion. ''How do you grow revenue 25% in an industry that's probably going to grow between 2% and 10%?'' Wolf joined other analysts in slashing Compaq earnings estimates. Its shares, already trading significantly off their 52-week high of 49 1/4, slid 22% on Apr. 12, to 24 1/16. LOSING GROUND. The outlook for the PC industry does not offer much encouragement. On Apr. 13, chip giant Intel Corp. (INTC) reported on-target earnings, but sales fell short of forecasts. For the current quarter, Intel warns, sales will be flat to slightly down. Analysts are already expecting PC shipments at Gateway 2000 Inc. (GTW) to be flat for the second quarter, which could mean suppliers will be chasing buyers. Hewlett-Packard Co. CEO Lewis E. Platt advises his big customers: ''If you order 20,000 PCs these days, make sure you get a really big discount. Otherwise, you're getting screwed.'' Compaq may not be alone in its misery, but the Houston giant has more problems than many of its rivals. Even as prices have deflated in desktop computers, Compaq has lost ground in PC servers, once the fastest-growing part of the business and, with 30% gross margins, a handy way to offset shrinking profits in desktop computers. Compaq has also struggled to revamp its distribution to become more competitive with direct sellers such as Dell Computer Corp. (DELL). And so far, it has failed to reap the benefits it sought last June with its $8.7 billion acquisition of Digital Equipment Corp. The server problem is among the most troubling. Analysts had factored in a healthy server business when plotting Compaq's future. What's more, analysts believed the combination of Digital's server business, whose gross margins are around 50%, with Compaq's server operations would help boost Compaq's overall server margins. But so far, it hasn't worked out that way. Competitors IBM (IBM), HP (HWP), and Dell have been vying for market share, setting off price competition in servers, too. Because Compaq was boasting about its gross margins on servers, says Dell server chief Michael D. Lambert, ''we saw that they had become very dependent on those profits and were subsidizing other businesses with [them]. We purposely became very aggressive in our pricing.'' According to Ziff-Davis Market Intelligence, for the three months ended in February, Compaq server sales through U.S. dealers were down 31% from the same period a year ago. The toll, reckons CIBC Oppenheimer Corp. analyst James D. Poyner Jr.: Compaq's PC-server revenue plunged 22%, to $2.86 billion, in 1998, down from $3.68 billion a year earlier. Over the same period, gross margins fell from 30% to 24%. And for the first quarter, market researcher International Data Corp. says preliminary results show server sales have slowed. ''I'm expecting Compaq to come in a little lower,'' says IDC analyst Amir Ahari. It also hurts Compaq's server business that the company isn't seen as a big player on the Internet. While Sun Microsystems Inc. (SUNW)--and to a lesser degree, IBM--have positioned their servers as engines for E-business, Compaq has missed out. On Apr. 13, Pfeiffer tried to correct the problem by unveiling a program to use its large computers and service skills to get customers on the Net. Compaq says it won't give out any more details about its business until an Apr. 21 meeting with analysts. But the analysts aren't waiting till then to crunch the numbers. ''Something has gone wrong with servers. That is one of the things I think they're hiding,'' says Wolf. ''If that is the case, we're looking at dramatically reduced profits going forward.'' Meanwhile, Compaq management still has its hands full integrating the Digital operations. The company has yet to completely merge information systems for both companies, for example. ''They got a good price on [Digital],'' says Merrill Lynch & Co. analyst Steven M. Milunovich. ''But now there are a lot of moving parts to the company. That makes execution tough.'' Finally, Compaq is struggling to keep up with changes in its core PC businesses. The most important is direct selling--over the phone and on the Net. Analysts say Compaq's missteps in launching a direct strategy may have cost it market share. Ziff-Davis Market Intelligence says that, according to preliminary data, Dell took the lead in sales of PCs to corporate customers in the first quarter, grabbing 21.2% of the market, compared with 18% for Compaq. Pfeiffer is determined to make his Y2K target. He estimates that first-quarter sales are only 5% off expectations. And, he says, the answer is yes, Compaq can make it to $50 billion by 2000. But the crowd of naysayers is growing. By Ira Sager in New York, with Peter Burrows in San Mateo, Calif., and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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