InformationWeek
Defining The Business Value Of Technology
August 2, 1999
Compaq Maps Rebound After 2Q Losses
More layoffs coming, but vendor says it has strong plan to focus on E-business
"Increasing customer satisfaction and loyalty is one of our most important corporate objectives," Capellas said in a conference call with analysts following the earnings announcement. That's a key reason he recently reorganized the company into three divisions: enterprise solutions and services; commercial PCs; and consumer PCs, each with profit-and-loss responsibility. By grouping high-end systems and services into a single business unit, for example, Compaq believes that it can move to market more quickly with end-to-end offerings for enterprise customers building E-commerce systems.
Service revenue grew at a disappointing 6% rate in the last quarter, according to Compaq. To boost that, the plan is for Compaq and its Digital Equipment operation to stop "looking like separate companies. We're going to look like a common Compaq aimed at a common target," says Tom Ionnatti, VP of marketing and sales at Compaq Services. Ionnatti says the 27,000-employee services division won't be affected by the latest reduction of up to 8,000 jobs, or the remaining 2,000 of the 17,000 layoffs Compaq planned when it acquired Digital.Compaq declined to say where the layoffs would come from.
There were bright spots in Compaq's second-quarter earnings: Although its loss of $184 million was a far cry from its operating profit of $32 million during the year-ago quarter (excluding special charges), sales of Wintel servers and storage products grew at 36% and 40%, respectively. Commercial PC revenue grew 19% from the second quarter of 1998, though Compaq has been losing ground to Dell Computer and IBM.
Jim Poyner, an analyst at CIBC World Markets, says Compaq's chief problem is that the high-end servers it gained with its Digital and Tandem acquisitions "are not contributing enough sales. They have to market more aggressively there. They need these margins to offset weaker margins in PCs and cover higher expenses from the Digital acquisition."
Capellas says Compaq will continue to invest in Digital's Tru64 Unix, and it recently pledged to support OpenVMS for the next five years. But some business customers say they're still unsure about which platforms Compaq will continue to support. Gary Cooper, VP of information services at food processor Tyson Foods Inc. in Springdale, Ark., says he's replacing his VAX/VMS systems with IBM and HP Unix systems. "I think that somewhere in the future, Compaq is not going to support Digital architecture at all. We're in a race to replace those systems before that happens," he says.
Compaq still faces a conflict between pursuing a direct sales and service model and maintaining its channel relationships. Analysts say Compaq loses about 10 percentage points of gross margin annually because of its indirect distribution model. Capellas has said he wants to move to 25% direct sales over the Web by year's end, with a goal of reaching 40%. But Compaq continues to develop programs to avoid alienating channel partners. This week, sources say, it will unveil the Compaq Service Network, a training and online lead-sharing program to help service providers tackle more installation and integration jobs in addition to traditional maintenance and repair. Compaq will also funnel bonus incentive money and leads to partners that meet customer-satisfaction goals.
--David Kleinbard and Ramin P. Jaleshgari
Related links:
And from our sister publications:
ompaq's new president and CEO, Michael Capellas, said last week that the world's largest PC maker would reduce its workforce by as much as 12% and take a $700 million to $900 million restructuring charge in the wake of another money-losing quarter. The company is grappling with intense price competition in the PC market, sluggish growth of its high-end servers, and a cost structure that's not competitive with that of direct vendors. But Capellas says Compaq is poised to get back on track with its vision, articulated just months ago, of becoming a leader in delivering products and services for advanced electronic business networks.
Back to This Week's Issue
Featured Microsite
