July 10, 2001 4:40 PM PDT

Compaq: Sales down, more layoffs in store

Compaq Computer announced Tuesday that it expects to post second-quarter operating earnings in line with Wall Street estimates, but said sales will come in below forecasts and announced further job cuts.

Compaq said in a statement that its second-quarter earnings, on an operating basis, will be 4 cents a share, in line with the current consensus estimate of analysts polled by First Call. Revenue will be about $8.4 billion, down 9 percent from the previous quarter, Compaq said. The computer maker attributed the sales decline to "worsening economic conditions in Europe."

Compaq had previously said it would cut 7,000 jobs, including 2,500 through attrition. The company now plans to eliminate 8,500 jobs this year, about 12 percent of its work force, virtually all through layoffs, a Compaq representative said.

"Our attrition has been lower than expected," Chief Financial Officer Jeff Clarke said in a conference call with analysts. The company now plans to use layoffs to cut staff where it had hoped to cut through attrition. In addition, the company is making 1,500 new job cuts, which will also be made through layoffs.

The job cuts should save the company $900 million a year, Compaq said.

"We are committed to taking aggressive actions during this period of slow demand to make permanent improvements in our business model," CEO Michael Capellas said in the statement. "It is now clear that the economic slowdown is spreading overseas, and we will therefore move more swiftly and go even deeper in our structural cost reduction programs."

Compaq said a restructuring charge of $490 million will cover the reduction of approximately 4,000 positions. The company said the job cuts will be primarily from its Internet access segment and supply chain and administrative functions, both in the United States and internationally.

In April, Compaq said it expected to post second-quarter earnings of 5 cents a share, on revenue of $9 billion.

Lehman Brothers analyst Dan Niles said Compaq's warning is a sign of growing problems overseas that could impact many of the major global technology companies, including companies such as IBM, Sun Microsystems and Hewlett-Packard. Niles noted that Compaq attributed its $600 million revenue shortfall to weakness in Europe and pointed to signs of slowing sales and currency weakness in both Asia and Europe.

"That's not a Compaq-specific issue," Niles said. "That's a global technology issue."

Earlier Tuesday, UBS Warburg analyst Don Young lowered his earnings and sales estimates for Compaq's second quarter.

Young has not been alone in expressing worries about the PC sector. Salomon Smith Barney analyst Rich Gardner cut estimates last month on Compaq, Gateway and Dell Computer, citing continuing slowness in Europe and in the United States, along with PC pricing issues.

Niles said that although PC companies have been pointing to signs the U.S. market has stabilized, that may not be enough to spark a recovery in the second half of the year.

"The big issue is (that) the other 60 percent of the world that buys this stuff is now looking" weaker, Niles said.

As for Compaq, Niles praised Capellas for "ruthless cost-cutting" that enabled Compaq to only miss its original per-share earnings forecast by a penny, despite such a big revenue shortfall.

"That's a pretty amazing accomplishment on his part," Niles said.

 

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