Oct. 24, 2001, 2:02AM
Compaq's loss not as much as company had predicted
By TOM FOWLER
Copyright 2001 Houston Chronicle
Compaq Computer Corp. stuck to its word Tuesday by reporting grim results for the third quarter, but the company is also sticking by its plans to merge with top competitor Hewlett-Packard Co.
Earlier this month the company warned that the looming recession, terrorist attacks and a pair of typhoons combined to create the worst possible business conditions. At the time the company said it would report an operating loss of $150 million from revenues of $7.4 billion to $7.5 billion.
The operating loss reported Tuesday was somewhat better, at $120 million on revenues of $7.5 billion, not including a $379 million charge for its investment in Internet holding company CMGI. Including the charge, the loss was $499 million, or 29 cents per share, down from the $557 million, or 31 cents per share profit reported for the same quarter last year.
"It goes without saying the third was the most challenging quarter for Compaq and for our industry," said Chairman and Chief Executive Officer Michael Capellas.
Revenues in the Access Business Group, which includes desktop and notebook PCs, was $3.3 billion, down 42 percent, for a loss of $248 million. The company's enterprise computing segment reported a loss of $104 million on revenue of $2.4 billion.
Compaq Global Services was the one bright spot, with revenues growing 2 percent to $1.9 billion. Operating profit improved to $284 million, or 15 percent of revenue. The services business now comprises 25 percent of Compaq's revenue, up from 23 percent in the second quarter.
Capellas said Compaq gained market share in storage despite the problems.
"I believe that we performed well compared to some of our major server and storage competitors, however," Capellas said. "And I am confident that when the market rebounds, our momentum will continue."
A copy of an internal Compaq employee memo sent to the Chronicle said that despite the losses, the company landed some of its biggest contracts in several years.
A $1 billion contract with the U.S. Postal Service was the largest, while Compaq's role as a subcontractor to GTSI Corp. on a $857 million U.S. government defense project was also noted.
The memo also mentioned a number of deals that had not been publicized recently. The memo claimed the company beat IBM, Hewlett-Packard, Sun and Dell Computer Corp. for a $150 million contract with Unicom, China's second-largest telecom operator. It also bragged of a $120 million deal supplying ABN Amro Banking Group, Europe's largest banking group.
Capellas told analysts Tuesday that he doesn't expect improvement until the second half of 2002.
He reaffirmed plans to go ahead with the proposed $19.8 billion takeover by Hewlett-Packard, saying it still appeared to be on track to close in the first quarter of 2002. While most investors and analysts were negative when the deal was announced in September, there are indications Capellas is no longer alone in his rosy outlook.
Compaq's shares have risen 20 percent since Oct. 2, a day after it issued its warning. Shares closed down 25 cents on Tuesday at $9.40.
At a forum in Orlando, Fla., this month held by Gartner Group, a technology research firm, some smaller institutional investors expressed some support.
"We're not a huge fan of the merger, but it does make some sense by allowing the bigger company to challenge International Business Machines Corp., the biggest computer maker," said Todd Ahlsten, director of research at Parnassus Investments.
One of the more surprising reassessments of the merger came this week came from Ashok Kumar, a managing director with US Bancorp Piper Jaffray.
For years Kumar has been critical of Compaq's many restructuring efforts, saying they all failed to address the competitive disadvantage the company had to Dell Computer. When Compaq and Hewlett-Packard announced their merger plans in early September he wrote a review of the deal titled "O Dr. Kevorkian, Where Art Thou?"
But in a piece written for CNET News this week, Kumar softened his criticism.
"The combination of the two companies does create an incredibly broad product line that in some ways surpasses even IBM's," Kumar said.
Compaq's fault-tolerant systems, products it acquired when it purchased Tandem in the late 1990s, are some of the most reliable systems around, Kumar said. And technology Hewlett-Packard gained from its Convex purchase gives it some of the most powerful scientific computers in the world.
Kumar went on say Compaq's move to phase out some of its proprietary high-end systems, such as the Alpha system, in favor of the Itanium chip being developed by Intel, also puts the merged companies in a good position in the future.
Kumar doesn't give the deal a thumbs-up, however.
"To realize the projected $2.5 billion in cost savings will require a large number of layoffs, including in the server area," Kumar said. " ... A major challenge will be retaining key personnel through the massive restructurings that the merger will require."
