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Financial Update


Compaq Targets Services As Earnings Fall Sharply
The price-battered PC market has taken a toll on Compaq, but the PC and server maker could pull through by turning its attention to services. Despite overall weak second-quarter earnings, Compaq's revenue from its Global Services arm rose 7% in the second quarter compared with last year. Another bright spot: Compaq cut inventory by almost $1 billion in the first six months of 2001.

Observers say Compaq (CPQ-NYSE) should aim to boost sales of high-margin products such as services. "They need to be more like IBM, and that's the direction they seem to be taking,'' says Technology Business Research analyst Lindy Lesperance. In June, Compaq said it would spend $500 million over the next several years to acquire IT services companies specializing in select industries.

Compaq last week reported that second-quarter earnings fell 83% to $67 million, down from $388 million in the year-ago quarter. Including a $493 million restructuring charge, Compaq posted a second-quarter loss of $279 million. Revenue declined 17% year over year to $8.45 billion. Sales of enterprise systems fell 21%, while PC sales declined 22%.

Compaq says things aren't likely to get much better in the coming months, citing weakness in Europe and other overseas markets. As a result, company officials say, third-quarter revenue is likely to miss earlier forecasts.

--Paul McDougall ([email protected])

Outsourcing Deals Fuel EDS
EDS's revenue and earnings both grew during the second quarter on the strength of the company's IT outsourcing business. The world's second-largest IT service provider, behind IBM Global Services, last week reported $7 billion in new customer contracts, compared with $6.1 billion for the same quarter a year ago. New business includes $469 million from FranklinCovey, $390 million from U.K. bank Abbey National Group, and $271 million from the Bank of Canada.

The contracts fueled net income of $300 million on $5.1 billion in revenue for the quarter, ended June 30. EDS (EDS-NYSE) says earnings rose 18% compared with the $254 million from the second quarter of 2000, and revenue rose nearly 11% from $4.6 billion for the same period a year ago. In the second half of the year, says Merrill Lynch

VP Stephen McClellan, EDS will have to offset declining revenue from its A.T. Kearney consulting business unit and from its largest client and former owner, General Motors Corp.

--Larry Greenemeier ([email protected])

PeopleSoft Beats The Odds
Not every company is in the financial doldrums. PeopleSoft Inc. (PSFT-Nasdaq) reported a gangbuster second quarter, ended June 30, with profit up more than 190% and revenue up 27%.

Jim Pickrel, a J.P. Morgan H&Q senior analyst, says the results exceeded his expectations and indicate healthy market acceptance of PeopleSoft 8 CRM software. "Clearly, this is becoming a really well-managed company," he says.

For the quarter, PeopleSoft posted net income of $47 million on revenue of $533 million, compared with a $16 million profit on revenue of $420 million last year. Much of the sales growth is attributed to a 51% increase in licensing fees. It's the fifth straight quarter PeopleSoft has reported record sales and profit.

--Tony Kontzer ([email protected])

New Accounting Rules Look Good For CA
Despite what it calls a tight market, Computer Associates managed to post healthy earnings for its first quarter, ended June 30. CA (CA-NYSE) reported net income of $323 million on revenue of $1.44 billion based on accounting methods it adopted last fall to reflect a change in its business model to sell software on a subscription basis.

Under those same rules, CA would have reported a profit of $201 million on revenue of $1.32 billion a year ago. Under the old rules, CA would've shown a loss of $342 million in its first quarter, compared with a $23 million profit a year ago. Not all was positive: Revenue from professional services fell to $81 million, compared with $141 million last year.

CA's systems-management sales could pick up later this year, says Richard Ptak, a Hurwitz Group senior VP. "Purse strings are starting to loosen a bit," he says, "and decisions have to be made."

--George V. Hulme ([email protected])

BMC Software Sales Down But Services Up
Sales of BMC Software Inc.'s enterprise-management software took a hit in its first quarter, ended June 30, leading to a loss of $34 million, compared with net income of $10 million for the same period last year. Revenue fell 9% in the quarter to $339 million, compared with $373 million a year earlier. BMC (BMC-NYSE) blames the poor economy for the slowdown.

BMC reported healthy sales gains from its maintenance and professional-services operations, up 11% and 15%, respectively. But sales of software licenses dropped 22% to $180 million from $230 million in the year-ago quarter. North American license revenue dropped 28%, while international license revenue fell 8%. The first-quarter loss includes one-time charges and amortization of goodwill and intangible assets.

--Rick Whiting ([email protected])

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