Compaq 1Q Results As Bad As Expected

Compaq's first-quarter financial results, announced this morning, were consistent with the company's April 9 warning that both profit and revenue would fall significantly below Compaq's goals for the quarter.

Compaq reported net income of $281 million, or about half of what the company had anticipated prior to the earlier warning. Although revenue was up 66% to $9.4 billion compared with last year's first quarter, it fell below Compaq's goal. The first-quarter revenue includes sales of products that came from Digital Equipment Corp., which Compaq acquired in mid-1998 for more than $9 billion. "Despite our overall corporate strength, our first-quarter results are disappointing and unacceptable," said Ben Rosen, chairman and acting CEO, in a conference call. "We clearly need to address some execution issues."

Compaq executives said sales of commercial PCs fell below expectations for the quarter, and said the company faced particularly stiff competition for sales to large corporate accounts. In addition to lowered revenue due to competitive pricing, the demand for PCs from the business market was less than Compaq had anticipated.

The company said sales of high-end servers also fell short of expectations, and that had a significant impact on gross margins. The services business was the only standout among the company's units, meeting Compaq's goal with revenue of $1.6 billion.

Rosen says these results, combined with concerns about weak executive decision-making and the belief that Compaq had not performed to its potential in the past few years, led board members to ask for CEO and president Eckhard Pfeiffer's resignation last weekend. Rosen says the company has started a search for a new CEO--but in the meantime, it won't delay in making decisions that could help restore health to the company. "(Our) only prudent course is to take a fresh look at all of the company's operations," Rosen said. He said there are currently no plans to restructure the company, although Compaq is planning to divest of unnamed technologies that are not consistent with its core business strategy.

Compaq cited some positive developments in the quarter, including a rapidly growing consumer PC business; success with its direct sales of Prosignia PCs to small and midsize businesses; initial success with the recent launch of NeoServers for small and midsize businesses; and growth in its storage and Web server businesses.

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