Compaq, One Year Later

FRAMINGHAM (04/03/2000) - Compaq Computer Corp. has successfully weathered the storms of the past year, but some gray skies still linger for the $40 billion computer giant, according to a new Computerworld poll and interviews with users and analysts.

Since the ouster of CEO Eckhard Pfeiffer a year ago and the installation of Michael Capellas as Pfeiffer's replacement last July, Houston-based Compaq has clearly become a stronger company that provides excellent services, PCs and high-end servers, polling results and interviews show.

But users and industry analysts still have questions about Compaq's future. Why can't Compaq's stock price climb above the low $30s? How will it distinguish itself from tough competitors such as Dell Computer Corp. in Round Rock, Texas?

High-end users wonder about Compaq's devotion to the Alpha server platform and VMS operating system, adopted after its June 1998 acquisition of Digital Equipment Corp. in Maynard, Massachusetts.

And some users even say that some of Compaq's bright spots, like the new iPaq desktop PC or its move to direct sales, have been dimmed by the company's inability to clearly communicate their value to customers.

These signs of softness were found in last month's Computerworld survey, in which 151 current Compaq users were asked which Compaq products they use today in 10 categories and which ones they'll use in 12 months from the same categories. Overall, the number they say they'll use decreased in eight out of 10 categories.

That finding contrasts with a solid 69 percent who say Compaq understands the needs of enterprise customers, up from 53 percent in a January 1999 Computerworld poll. So while 69 percent of users surveyed say they have faith in the company, they also indicate that they expect to buy somewhat fewer Compaq products over time.

Shaky Perceptions

"I'm more positive on Compaq's overall prospects than I was a year ago, but I'm not pounding the table on them," says Charles R. Wolf, a financial analyst at UBS Warburg in New York, who rates the Compaq stock a less-than-optimistic Hold.

Uncertainty underscores comments by many users in the poll. "A year from now, I'll probably be just as big a Compaq user as I am now, but I say ‘probably' as long as they don't do anything shaky," says Scott Thomas, manager of systems and programming at Alcan Aluminum Corp. in Terre Haute, Indiana.

Alcan just purchased three Alpha servers from Compaq and is happy with the products and service for them. But Thomas says he was shocked when Compaq said last August it wouldn't support Windows NT on its Alpha line, and he wonders what that will mean.

"We watch them carefully, and if they [Compaq] trend to extinction, that will affect the products we buy," he adds. "I'd like some more backing for the VMS environment and some reassurances. Their product is OK, but the business end of Compaq seems shaky, and customers leave companies for that reason."

Threat From Dell

Some customers say Compaq is also failing to show the moxy of Dell, especially in competing for their business.

"We bought Dell servers last November, even though we were interested in Compaq," says Paul Kirk, senior vice president of MIS at United Companies Financial Corp. in Baton Rouge, La.

"We asked for quotes from both, and Dell came in and stomped Compaq," Kirk says, adding that he didn't understand why Compaq wouldn't compete on price.

Several analysts say Dell sales teams swooped in last year to grab Compaq enterprise business accounts when Compaq was in disarray, but the trend seems to have slowed.

Still, customer satisfaction ratings from September through February were higher for Dell than for Compaq or IBM according to Computerworld's BrandTrack research - a survey of customer loyalty and satisfaction that is sent to thousands of IT buyers each month.

Over the past year, BrandTrack found that more customers planned to stick with their Dell desktops, PC servers and notebooks than did Compaq customers.

Roger Kay, an analyst at International Data Corp. in Framingham, Massachusetts, says IDC's surveys have shown similar softness for Compaq. "In terms of brand loyalty, Dell is clearly above the others," he says.

In reaction, Compaq spokesman Alan Hodel says Compaq still sells more PCs than any vendor, adding that half of Compaq's revenue comes from enterprise servers and services that have nothing to do with PCs. Compaq's report for fourth-quarter 1999 showed $332 million in profits on $10.5 billion in revenue, a decrease of 4 percent over the same quarter in 1998, but higher than analysts' expectations.

IPaq Innovation

The new iPaq PC, which Compaq started shipping in January, could help in the desktop battle with Dell and other large vendors. The small, stylish iPaq starts at $499 and boasts features that allow easy Universal Serial Bus connections and reduce many desktop variables to help companies lower the total cost of ownership, a major concern of users.

When the iPaq was announced, Compaq said the project took half the normal design-to-production time, a sign to industry observers that Capellas was solidly in charge. The product is being imitated by IBM and Hewlett-Packard Co., but iPaq was the first on the street, and analysts say Compaq can sell $1 billion worth of iPaqs by the end of this year - although several analysts say they've had trouble gauging early sales.

Reviewers raved when the product was released, yet Kay says he suspects it hasn't caught on as fast as Compaq had hoped. "My sense is that sales aren't doing overwhelmingly well because Compaq's not crowing about it anymore," Kay says.

Compaq wouldn't discuss sales or other financial data because of the quarterly report silent period required by the Securities and Exchange Commission as a guard against insider trading.

Users widely praised the iPaq concept in interviews, but they were also confused about its functions and its future evolution.

"The iPaq TV commercial is too vague, but it looks like a real small box," which would be an advantage for crowded desks, says Terry Arnold, business systems and support manager at Alliant Energy Corp. in Dubuque, Iowa. Arnold says he wants to hear from Compaq how far the iPaq or another Compaq machine will go down the path toward becoming a true thin client - a desktop device that functions like a terminal on a network.

Direct Distribution Dilemma

The iPaq is being sold directly to customers as part of Compaq's major initiative to build a direct sales model. It has a goal of 40 percent of direct sales by year's end, an increase from the current level of about 15 percent.

A few medium-size businesses say they worry the direct model won't serve their needs, because they aren't able to command Compaq's attention the way the largest customers do.

"We've recently had trouble acquiring [Compaq] products quickly, and if you don't have good turnaround, what's the point of going direct?" says Mark Geery, manager of MIS at Tony's Fine Foods in West Sacramento, California.

Geery says his company tried to buy 30 laptops from Compaq but couldn't get them soon enough for reasons that weren't explained. So instead, it bought laptops from San Diego-based Gateway Inc. Moreover, he says he was frustrated when he ordered a Compaq docking station for his own laptop last September but didn't receive it until February.

Compaq didn't comment on the specific case, but a spokesman notes that Capellas has said Compaq will move quickly to advance the direct strategy through the recent acquisition of some assets of Omaha-based InaCom Corp. and creation of the Custom Edge subsidiary. Analysts say Custom Edge can help smooth out wrinkles in the transition affecting customers.

Direct sales will decrease distribution costs at Compaq by as much as 6 percent, reason enough to make the move, say analysts. Still, some customers question how they'd benefit, especially if they like the value-added reseller (VAR) they already use and know.

Compaq will never go 100 percent direct, according to analysts, partly because it can't completely shut off relationships with VARs. But Compaq needs the direct sales model "if only to regain the intimacy with customers they've lost," says Kevin Knox, an analyst at Gartner Group Inc. in Stamford, Connecticut.

"Direct gives customers the opportunity to have one neck to strangle instead of several when there's a problem," adds analyst Lindy Lesperance at Technology Business Research Inc. in Hampton, New Hampshire.

Computerworld's survey shows that a majority of Compaq customers feel that the direct model is important to them. Of 37 respondents who have used it, a large majority say they're satisfied.

The Compaq move to direct sales probably is a reaction to Dell's huge success with direct sales, which was evident in Dell's movement last year into the top spot for PC unit sales in the U.S.

Some of Compaq's customers are less concerned with the Dell threat than with Compaq's possible failure to deliver on the high end, however. Those customers are still distressed by Compaq's inability to fully integrate the personnel and functions of Digital, says Terry Shannon, editor of the "Shannon Knows Compaq" newsletter in Ashland, Massachusetts, and a board member of the Digital Equipment Computer Users Society.

"The Digital integration is structurally in place, somewhere above 80 percent done, but Compaq should have come this far a year ago," Shannon says.

Even if the integration of the Tandem division and Digital is mostly accomplished, only 40 percent of the users surveyed say they agree that Compaq is committed to supporting and enhancing technologies from the two companies.

Uncertainties about Compaq's future stem partly from the hypercompetitive market in which seemingly little things take on bigger meaning: whether Capellas visits enough big customers or gives a good speech for investors, or what the stock price did today, for example.

"Compaq has really tough competitors, so it's future isn't just a matter of performing well, it's a matter of performing really well," says UBS Warburg's Wolf.

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