Compaq Computer experienced an earnings shortfall in the first quarter as a result of general industry slowdown and reduced pricing, Eckhard Pfeiffer, chief executive officer of the company, says.
"The shortfall happened both in sales as well as in reduced pricing throughout the quarter, obviously affecting the top line as well as the bottom line," Pfeiffer said in a conference call. This is not the first time the industry has seen a "slight reduction" in market demand, he said, adding, "It is not huge. It is several percentage points."
However, analysts were sc eptical of Pfeiffer's finger-pointing at the industry, saying Compaq's difficulty in transitioning to direct sales and in managing inventories is more likely the cause.
On Friday the company announced that its financial results for the first quarter, which ended March 31, would be lower than expected, with revenues estimated at $US9.4 billion and earnings per share at 15 cents.Analysts polled by First Call had predicted Compaq would report earnings of 31 cents per share.
Hewlett-Packard Co. reacted to Compaq's news today with a statement of its own, saying that it has achieved its revenue goals in its PC business, while improving profitability during the second quarter which ends April 30.
"We are not seeing the weakness some of our competitors are reporting," said Duane Zitzner, president and CEO of HP Computing Products, in the press release. "We have delivered growth that is on plan and profits that are above plan."
Pfeiffer, however, insisted in his conference call that "the market grew slower than the projections from last year for the first quarter."
The shortfall was primarily in the corporate segment, not the consumer segment which has been on target with earnings projections, according to Pfeiffer.
"Obviously, we saw the heaviest pricing pressure on the commercial PC side at the low end, which generated higher volume at lower prices," he said. "We have a somewhat heavier mix towards the low-end on the product side ... in addition to the pricing pressure, that explains the sales as well as the margin shortage."
Pfeiffer was optimistic about the future, though.
"Clearly, we believe that we have been through a typical first quarter. Somewhat slower demand and somewhat aggressive pricing," he said. "There will be most likely demand increases, we believe, in the second half (of the year) in the consumer sector and small business sector where Y2K is not the issue."
The lower than anticipated demand for Compaq computers was mainly in the U.S., with demand in Europe about what was expected and improved demand in Japan and the Far East, according to Pfeiffer.
Pfeiffer declined to answer specific questions about the financial figures, deferring them to April 21, when the company will announce its first quarter earnings.
When asked if the process of integrating Digital Equipment into Compaq had contributed to any difficulties, Pfeiffer said it had not.
"Yes, we have not yet one system full up and running in terms of accounting and general ledger systems. We are working on that and that has not really been a major factor in the outcome for the quarter," he said. "We are on target with everything happening around the world" as far as integrating Digital.
Pfeiffer also said relations with channel partners were good despite the company's moves to sell direct to customers.
"The relationship with the channel is excellent. Let me say that very loud and clear," he said. "There may be one or two disgruntled resellers someplace... The overall picture is it is working very well."
Analysts said Compaq's lumbering integration of Digital may have hurt the company, but not as much as its transition to direct sales, lower prices, large inventory and customers holding off their purchases to wait for systems based on the newest microprocessor from Intel Corp., the Pentium III.
"You can't call it a downturn for the industry because we're seeing at the unit level more demand than ever," said Tim Bajarin, president of Creative Strategies Inc. in San Jose, California.
There's no question that the company's transition to include direct sales hurt it, Bajarin said. "More and more buyers are moving to the direct model. Compaq, while they've started to move there, have been much slower," he said.
Meanwhile, a lot of corporate customers held off on buying new computers until the Pentium III was released, according to Bajarin.
Roger Kay, an analyst with International Data in Framingham, Massachusetts, said Compaq also suffered from inventory troubles, which would be resolved if the company had a clear direct sales plan.
"They get caught with inventory when there is a technology turn," he said. "They have to do something with the old stuff. Usually they discount it heavily and sell, but that cuts into their margins.
"They can't stop using their channel partners. On the other hand it's just not as efficient as selling direct so they continue to bleed market share from time to time," Kay said.
Dave Jones, technical editor at the California Technology Stock Letter, said Compaq has a tendency to stuff the channel. "Meaning, that they piled a lot of inventory in in December, sold it into the channel and it was more than the channel could absorb," he explained. "I tend to think this is more specific to the company."
For Jones, the most interesting aspect was that Compaq was so late in figuring out it had a problem. "They blame it on information system problems ... trying to integrate Digital IT systems which would help with forecasting," he said. "More than anything else, I think they've hurt their credibility with Wall Street. Ideally they would have done it (issued the earnings warning) in the last two weeks of March."
"What's notable is the absence of any pre-announcement from any other vendors, so it's not a widespread problem," said Eric Lewis of IDC, who noted that Intel Corp., usually quick to issue earnings warnings and a bellwether since it sells to most PC makers, hasn't issued a warning. "Plus, all the indications were that unit demand was strong" during the quarter.
One of Compaq's main problems is that it has to adjust prices downward more quickly than they'd like, according to Lewis. "I'm concerned about the non-PC business (at Compaq). The Digital acquisition is not yet showing any real fruit," he added.
Both Kay and Bajarin had positive forecasts for Compaq following the troublesome quarter.
"They're still the No. 1 player and I don't necessarily think that's going to change," said Bajarin. "I think they will have to be more competitive in pricing and be more reactive to the way customers want to buy. I'd be real surprised if what has happened in the past six months has any long-term impact on the company."
"I think Compaq is probably going to enjoy seasonal swings in the second half" of the year, and will start seeing consumer volume pick up then, said Kay.
Compaq stock was down 7 to $23.93 on the Nasdaq stock exchange yesterday afternoon.
Compaq, in Texas, can be reached at +1-281-370-0670, or on the World Wide Web at http://www.compaq.com/.