Analysts Bearish on Compaq's Full-Year Outlook

FRAMINGHAM (04/26/2000) - Compaq Computer Corp.'s first quarter earnings, announced Tuesday, were mostly flat, leaving some Wall Street analysts skittish about how the Houston-based company might fare for the rest of the year.

"The report represented a mixed bag of performance and clearly did not signal an imminent turnaround in the fortunes of the company," said Charles Wolf, an analyst at Warburg Dillon Read LLC in New York.

Wolf said Compaq slipped down the side of a metaphorical bowl for most of last year and has since leveled off at the bottom "but has yet to climb up the other side."

Yesterday's earnings report showed Compaq's first quarter revenue was $9.5 billion, up 1% from the $9.4 billion it made in the same period last year.

Meanwhile, net income rose 16% to $325 million, up from $281 million from last year's first quarter.

Earnings for the quarter rose 19 cents a share - up from 16 cents a share for the first quarter of 1999. However, the most recent earnings includes one-time sales of investments, which most analysts discounted by three cents. A consensus of 29 analysts polled by First Call Corp. had expected Compaq's earnings to come in at 16 cents a share.

Compaq's high-end business services and servers unit experienced a 4% decline in revenue, to $4.7 billion. Income for that division dropped 13% to $568 million.

Sales for the company's commercial PC group improved from the previous three quarters but still saw a revenue decline of 7% to $2.9 billion, with an operating loss of $19 million, compared with a profit of $24 million for the first quarter of 1999.

Consumer PC sales jumped 35% year over year, to $1.8 billion. However, net income for the group was flat at $82 million.

"Beyond the consumer PC sales, a real standout, it wasn't a strong financial report," Wolf concluded.

Roger Kay, an analyst at International Data Corp. in Framingham, Massachusetts, concurred. Compaq's commercial PC division "is still below water but now high enough that it is snorting air with the water," he said.

Compaq's commercial PC sales have been hurt the most by Dell Computer Corp.'s direct sales model for corporate clients, Kay and Wolf said. Compaq is generating about 15% of its revenue from direct sales of all its equipment, with a goal of reaching 60% by year's end.

Several analysts said they view that goal as being very ambitious.

While Compaq said it has 120 orders for its new high-end Alpha Wildfire server, which is due to launch in May, analysts said this pent-up demand has hurt current server sales.

For Compaq, the high-end server market has "fallen into the doldrums in the short term," said Ashok Kumar, financial analyst at U.S. Bancorp Piper Jaffray in Menlo Park, California.

"The business of absorbing the purchase of Digital Equipment Corp. and its Alpha line is really taking a long time," Kumar added.

Should Compaq sell $1 billion worth of its Wildfire units by year's end, as it is hoping to, said Kumar, it could account for 10% of the company's profits, since the profit margins for those machines stands at more than 40%. But the billion-dollar sales mark is "just speculation," he said.

Wolf believes that Compaq will sell only half the Wildfire servers it expects to this year, or $500 million worth.

Compaq officials also predicted 10% to 12% revenue growth for all of 2000.

However, Wolf warned that Compaq generated just 1% revenue growth during its first quarter and "will really need to kick ass for the rest of the year to make that number."

Even if Compaq's revenue were to grow by 12% this year, "that really isn't that good," observed Wolf, "because you'd want it above 15% to say they are really (beating) their competitors."

For example, Compaq is still facing competition from a stable of very tough companies such as Dell, IBM and Hewlett-Packard Co., said Wolf and other analysts. "You can't afford to stumble against them," Wolf said.

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