Compaq cuts first quarter estimates, 5,000 employees

Citing continued weakness in the US economy, Compaq on Thursday lowered its earnings outlook for the first quarter of this year from US$0.14 to $0.12 per share, and plans to cut its workforce by 5,000 employees, according to company officials.

The company employs about 71,000 people.

First quarter revenues for the computer maker came in at slightly more than $9 billion, roughly four percent lower than revenues reported at the same time last year, officials said.

"We see continued weakness in the US economy, and resultant pricing pressures. Despite the slowdown, we are pleased with market acceptance of our enterprise products driven by our ability to offer end-to-end solutions and services," said Compaq Chairman and Chief Executive Officer Michael Capellas in a statement.

To combat market pressures, Compaq will merge its commercial and consumer computer operations into a single Access Business Group. The company will also continue working to reduce its channel inventory and streamline its production processes, officials said.

Compaq continues to struggle against competitors like Dell Computer for the worldwide PC leadership position, according to Ashok Kumar, an analyst withUS Bancorp Piper Jaffray, based in Menlo Park, Calif.

"While (Compaq) has been trying to move to a direct distribution model for over three years, the majority of its PCs still ship through an indirect channel, making it difficult to compete with (build-to-order manufacturer) Dell," said Kumar.

"Dell currently generates net margins of 6 percent with product margins of 18 percent, whereas Compaq will be at or below break-even with comparable pricing," Kumar said.

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