Compaq Meets Expectations, But Revenue Flat

FORT LAUDERDALE, FLA. (04/25/2000) - Compaq Computer Corp.'s growing pains as it tries to evolve from a PC manufacturer to a broader systems provider continue to plague the company, which today reported a minuscule 1 percent increase in revenue in the first fiscal quarter.

Compaq posted US$9.51 billion in revenue in the company's first fiscal quarter, ended March 31, 2000, compared with revenue of $9.41 billion in the same quarter of last year, Compaq announced this afternoon.

Compaq blamed the tiny revenue increase on a spending slowdown caused by the year 2000 problem, weakness in Europe and the company's measures to shrink its channel inventory. Adjusted for currency fluctuations -- a concept called "constant currency" in the release -- the revenue increase would have been 4 percent, Compaq said.

Net income, including an after-tax gain of $44 million from investments, was $325 million, or 19 cents per share, compared with $281 million, or 16 cents per share, in the same quarter last year. Excluding the after-tax gain, Compaq's earnings were 16 cents per share, which was the consensus from 29 analysts polled by First Call/Thomson Financial.

During a conference call this afternoon to discuss the results, executives, while not elated, said they were satisfied with the quarter's results, and pledged continued improvement in the coming quarters.

"I'm pleased with the overall transition from the fourth quarter to the first quarter," said Michael Capellas, the company's president and chief executive officer, noting that Compaq's first quarters have been weak in the past several years.

"We knew how important it was for us to meet expectations," Capellas said.

Operating expenses dropped 7 percent to $1.76 billion compared with last year's first quarter. This is the third consecutive quarter in which Compaq has posted an operating expense reduction, the company said.

"We're well positioned to reach our revenue-growth objective for the year," said Jesse Greene, the company's chief financial officer.

Compaq is betting on new products such as the iPaq Internet appliance and its upcoming Wildfire Alpha server, as well as on products loaded with Microsoft Corp.'s Windows 2000 operating system, to power its revenues this year, executives said. Wildfire's shipping date is sometime in May.

Revenue dropped 12 percent in the Europe/Middle East/Africa (EMEA) region and grew 39 percent in Latin America, 21 percent in Japan, 9 percent in Greater China and 4 percent in North America.

Executives blamed Compaq's problems in Europe partly to a lukewarm adoption of e-commerce in the region and to year 2000-related spending softness.

Compaq's Enterprise Solutions and Services Group saw its revenue fall 4 percent to $4.7 billion. This unit accounted for 50 percent of the quarter's revenue.

The Commercial Personal Computing Group had revenue of $2.9 billion, a 7 percent drop, and an operating loss of $19 million, compared with a gain of $24 million in the first quarter of last year. The loss, however, was 75 percent smaller than in the fourth quarter of last year.

Meanwhile, the Consumer Group's revenue reached $1.8 billion, a 35 percent hike, and operating income of $82 million, which represents flat growth compared with last year's first quarter.

"We do not underestimate the challenges that remain, but our progress is evident," Capellas said in the release.

Executives also said during the call that the transition of users of Alpha servers on Windows NT has gone better than expected, and that the company hasn't lost any clients over its decision to drop its support for NT on the Alpha platform.

Compaq had traditionally been a PC vendor, but began several years ago expanding its scope to become a provider of high-end servers. To that end, it has made a number of acquisitions in recent years, including Tandem and Digital Equipment Corp.

Observers have pointed out that the company has struggled to integrate the acquired companies' products and staffers, and that it hasn't had as much success as it had expected to have in the high-end server market so far.

At the same time, aggressive PC vendors like Dell Computer Corp. have started snatching away share in the PC market from Compaq, although Compaq still holds on to the number-one position, according to a variety of market researchers such as Dataquest Inc. and International Data Corp.

Compaq, in Houston, Texas, can be reached at http://www.compaq.com/.

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