By John Rogers
Compaq Computer Corp on Wednesday reported a widely-anticipated second-quarter loss and said it will cut 6,000 to 8,000 jobs as it moves to lighten its financial burden. The number one PC vendor posted a net loss for the quarter of $184m, or $0.10 per share, as the company’s self-proclaimed non-competitive cost structure continued to hinder its performance. Analysts surveyed by First Call were looking for a loss of $0.11 but, before Compaq warned of trouble ahead last month, Wall Street had been expecting positive earnings of $0.22.
Revenue for the quarter rose 61.5% to $9.42bn, while on a pro forma basis – accounting for acquisitions – the top line saw only 17% year-over-year growth. Compaq said on June 17 that it would book a loss of up to $0.15 per share for the second quarter, citing industry-wide pricing pressure and weakness in its European business, in addition to bloated expenses. The company also warned at that time that it would incur a substantial charge in its third quarter to cover the cost of a realignment expected to eliminate some $2bn in annual operating costs.
Now, in one of the first moves by newly-appointed chief executive Michael Capellas, Compaq will cut up to 12% of its work force and close some of its facilities. The actions will result in a third- quarter charge estimated at $700 to $900m. The job cuts come on top of the roughly 17,000 staff that were let go as part of the integration of Digital Equipment Corp. Making matters worse, the company says revenue will be decreased by about $100m in both the third and fourth quarters as a result of the previously-announced reduction of its total number of distributors from 39 to four. The new distribution model, designed to further reduce North American channel inventory, will take effect August 1.
Total gross margin for the second quarter was 20.5%, down from 24.7% in the first quarter. Compaq blamed the decrease on falling PC prices, an increase in warranty expenses associated with several commercial products no longer shipping, costs associated with discontinued programs and penalties related to some long- term purchasing contracts. Operating expenses rose to $2.2bn in the quarter from $1.9bn in the first quarter, mostly attributed to increased advertising and promotional activity, goodwill amortization and internal Y2K activities.
In the year-ago quarter, Compaq showed a net loss of $3.63bn after $3.23bn in charges directly related to the Digital acquisition and restructuring charges of $393m. Net of those one- time items, earnings for the 1998 second quarter would have been a positive $0.02 per share. In the first quarter, Compaq’s earnings were $0.16, far below initial expectations of up to $0.35 as pricing pressures and weak corporate demand began to take their toll on the bottom line. The removal of chief executive Eckhard Pfeiffer and several other top executives followed the poor showing. For the six-month period, net income was $97m, or $0.07 per share, on revenue up 63.5% at $18.8m, against a net loss of $3.62bn last year.
