Compaq Better Off, but Questions Remain

FRAMINGHAM (04/28/2000) - Things are better than they were last year, but Compaq Computer Corp. still faces an iffy 2000, based on its flat first-quarter earnings report and ongoing practices, analysts and users said.

Officials at Compaq last week said they expect to see 10% to 12% revenue growth this year. But that performance is less than the 15% to 20% growth needed to beat aggressive competitors such as IBM Corp., Hewlett-Packard Co. and Dell Computer Corp., analysts said.

Compaq said revenue grew by 1% in the first quarter, compared with the same period last year. So the company "will really need to kick ass for the rest of the year to make that [12% revenue growth] number," said Charles Wolf, an analyst at Warburg Dillon Read LLC in New York.

"Compaq is still a strong vendor, but I wonder what's the next step for them," said Paul Kirk, senior vice president of MIS at United Companies Financial Corp. in Baton Rouge, Louisiana. Compaq isn't being aggressive enough in beating competitors on desktop and server prices, Kirk and others said.

"Our corporate directive is to buy Dell desktops, even though we used to buy a lot of Compaqs, just because the price is lower," said Kenny Ridgeway, a systems manager at Solutia Inc. in St. Louis.

Terry Shannon, editor of the newsletter "Shannon Knows Compaq" in Ashland, Massachusetts, found the first-quarter report "pleasantly surprising," in part, because last year's was so hard.

Shannon said he was most impressed that Compaq CEO Michael Capellas reported operational expenses at $1.7 billion for the first quarter, a 7% decline from the same period a year ago and the third consecutive quarter of lower spending.

Several users and analysts said Compaq is far better off than a year ago when CEO Eckhard Pfeiffer was ousted.

When Capellas took over in July, he immediately reorganized the company and set out to cut expenses. But he is still dogged by declining PC sales to commercial customers and the complexity of integrating the high-end computers and services of Digital Equipment Corp. that Compaq purchased in 1998. The divisions devoted to enterprise customers and commercial PCs both saw revenue and income declines.

One bright spot in the report was that PC sales jumped 35% to $1.8 billion, though net income was flat at $82 million.

Compaq officials said they have 120 orders for the high-end GS AlphaServer, code-named Wildfire, that's being launched this month. Compaq is aiming for $1 billion in Wildfire sales this year, but Wolf expects only half as much.

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