Compaq Warns Of Second-Quarter Loss

\Compaq, the nation's leading personal computer vendor, surprised investors today by announcing that it expects to lose up to $260 million in the second quarter and that it will take a "substantial charge" in the third quarter to restructure the company.

This marks the second time this year Compaq has issued a gloomy forecast. In April, Compaq's board of directors ousted CEO Eckhard Pfeiffer, nine days after the company said first-quarter profits would be half of what analysts had expected. Benjamin Rosen is acting as Compaq's CEO while the company seeks a full-time replacement.

"The operational issues that affected Compaq in the first quarter continued to influence our business this quarter," Rosen said in a news release. "Pricing pressures in the PC segment, inadequate revenue growth, and a noncompetitive cost structure are the contributing factors to our expected shortfall."

Compaq said its revenue and gross margins will be flat or down sequentially from the first quarter, when the company reported net income of $281 million on revenue of $9.42 billion. Compaq's operating expenses, meanwhile, will increase from the first quarter.

"The company's forecast sounds pretty ugly to me," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "A lot of these problems are of their own making, but competitive pressure from Dell Computer is icing on the cake."

At the same time, Compaq will realign its business to save $2 billion in operating costs and move toward a more direct sales model. Compaq said the restructuring will involve layoffs, but declined to say how many employees will lose their jobs. The company emphasized that there will be "no change to sales-account managers or coverage of global accounts."

Compaq will establish three global business groups--Enterprise Solutions and Services, Personal Computer, and Consumer. The Enterprise Solutions and Services Group, headed by Enrico Pesatori, is being formed through the integration of the company's Enterprise Computing Group and Compaq Services.

The Personal Computer Group will continue to be led by Mike Winkler, and the Consumer Group will continue to be under the direction of Mike Larson. In addition, Compaq will create a global sales and marketing group led by Peter Blackmore.

Michael Capellas, Compaq's acting chief operating officer, said in a conference call that "the world of personal computers is moving to E-Commerce delivery." To that end, Compaq plans to open 17 call centers worldwide and improve its ability to sell configured computers from its Web site. The company aims to have a 25% "run rate" for direct sales by the fourth quarter, Capellas said.