This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Compaq Keeps Trimming Guidance

Updated from 5:37 p.m. EDT.

It's doing it again. After reporting second-quarter results Wednesday evening that plunged from year-ago levels, Compaq (CPQ) warned investors that its third-quarter sales would come in below expectations.

For its second quarter, Compaq said it earned $64 million, or 4 cents a share, matching the lowered consensus estimate of analysts polled by Thomson Financial/First Call and far below the 21 cents a share the company posted last year. Revenue came in at $8.5 billion, about $60 million lower than expected.

Then Compaq got down to the warning. The company said it expects third-quarter sales of $8 billion to $8.4 billion and earnings per share of 7 cents to 9 cents. Analysts were expecting sales of $8.7 billion, according to Multex.com, and earnings of 9 cents a share.

Earlier this month, Compaq warned that poor demand would cause its second-quarter results to fall far short of previous estimates. Compaq at that time also said it would fire 1,500 more workers than it had previously planned. The company set plans to fire 5,000 workers back in March and raised that number to 7,000 in April.

As with IBM's (IBM) second quarter, services was the best-performing segment, making up 45% of sales and bringing in $271 million in income. Without that segment, Compaq would have lost more than $100 million. The company lost about $155 million in its access segment, which includes the consumer PC business, where unit shipments plummeted 30% from the year-ago period. On the conference call following the earnings release, CFO Jeff Clarke called these results "unacceptable," and said the consumer business would be profitable in the fourth quarter of 2001.

As everyone already knew it would, price-cutting took its toll on the quarter. Gross profit margins came in at 21.5%, down a full percentage point from the previous quarter and off two percentage points from last year's second quarter.

Eating Dust
U.S. PC market share in the second quarter of 2001
Company 2001 share 2000 share Growth
Dell (DELL:Nasdaq) 24.0% 20.1% 9.8%
Compaq (CPQ:NYSE) 12.7% 14.8% -21.3%
Hewlett-Packard (HWP:NYSE) 9.4% 10.7% -18.8%
Source: International Data Corp.

Like competitors Hewlett-Packard (HWP), IBM and Gateway (GTW), Compaq has been losing market share steadily in 2001 to Dell, whose low cost structure has enabled it to slash prices aggressively and with relative impunity. In the first three months of 2001, Dell unseated Compaq as the worldwide market leader in PCs sales, according to Gartner Dataquest. Last week brought new data showing Dell building on its lead in the U.S. market.

Compaq needs to cut expenses enough to allow it to compete against Dell without sustaining huge losses. Part of that project will come about through "rightsizing," the euphemism companies have lately devised to describe the act of firing employees during a downturn in business. CFO Clarke said Compaq was ahead of plan on this front, having already fired 5,100 of the 8,500 workers it said it would let go. The company said it expects to see the full effect of the savings associated with those job cuts in the fourth quarter.

In the meantime, Compaq continues to make encouraging progress in its quest to reduce its inventory. In April, the company told analysts it would cut inventory by $450 million in the second quarter, $300 million of which would come from the stockrooms of dealers who resell the company's computers, a group known collectively as "the channel." The company ended up doing about $250 million better than those projections, cutting Compaq-owned inventory by $300 million and channel inventory by $400 million.

Clarke said that Compaq would eliminate another $300 million of inventory in the third quarter, $100 million of which will come from Compaq and $200 million of which will come from channel resellers. That should put the company pretty much where it wants to be, said Clarke. "The hard, structural part will be behind us" then, he said.

Compaq said it presently holds about six weeks of inventory in the retail channel, and 2.7 weeks in the commercial channel. Of course, Dell, with its wholly direct business model, has none in either channel.

After rising 27 cents, or 2%, to $14.12 in regular trading, Compaq was lately changing hands at $13.95 on Instinet.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,863.98 -178.92 -1.05%
S&P 500 1,958.23 -14.06 -0.71%
NASDAQ 4,447.3480 -46.0420 -1.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs