Compaq to slash 5,000 jobs
Published: 16 Mar 2001 08:45 GMT
Compaq Computer on Thursday warned it will miss first-quarter earnings estimates and cut 5,000 jobs.
The announcement, which followed a week of analyst downgrades and a profit warning from Intel, put Compaq's earnings per share between 12 cents and 14 cents, or flat year over year. The company projected revenue of $9bn (£6bn) to $9.2bn, 4 percent lower than last year.
Compaq previously forecast $9.6bn in revenue, flat year over year. Compaq also expects to report a $125m, one-time gain, mostly from the sale of its Road Runner investment. A consensus of analysts polled by FirstCall had expected earnings of 17 cents a share including the recent downgrades.
Texan-based Compaq expects to take a restructuring charge of $125m to $150m. The company also plans to cut 7 percent of its work force, or about 5,000 jobs. CEO Michael Capellas blamed the shortfall on the slowing U.S. economy. "Clearly we are operating in a challenging environment," he said. "The result of the actions we are taking today, coupled with our strong array of new products and solutions, will enable significant improvements in our business model and position us well in the mid and long-term."
Compaq also announced changes in management. Jeff Clarke will replace Jesse Greene as chief financial officer. Greene will become Compaq's senior vice president of strategic planning. Mike Larson, who had been responsible for Compaq's consumer division, will become senior vice president of the Access Business Group.
Compaq's retrenching comes amid a general slowdown in the PC industry. Morgan Stanley analyst Gillian Munson lowered estimates for the quarter and the year for Compaq on March 9, after Intel said that server sales to date have been lower than expected. "While Intel isn't the only data point to look at when analysing Compaq, it is a pretty big directional data point relative to other news in the market," she wrote.
Compaq is in the midst of a major organisational change with the formation of the Access Business Group, which will form from the merger of Compaq's consumer and commercial divisions. By merging research and development, manufacturing and other logistical operations, Compaq hopes to save between $500m and $600m a year. Most of the layoffs will result from the consolidation and changes in supply-chain and marketing organisations.
Kay said the consolidation makes sense. "There's not as much a functional difference between consumer and commercial PCs as there used to be," he said. "You are going to see more of this kind of consolidation." Kay pointed out that features such as network cards have moved from mainstream commercial systems to the consumer market, while multimedia functions on home PCs are more widely used at the office.
Still, Compaq, like other PC makers, faces challenges ahead. "In the context of the announcements from Intel and Cisco, these types of layoffs are not entirely surprising for a company focused in the computer industry," said Dataquest analyst Charles Smulders.
Given current economic conditions and forecasts, Dataquest predicts PC unit sales in the United States will rise a paltry 5 percent this year over 2000. But if a recession hits rather than a second-half recovery, all bets are off. "In a recession, that number would be flat or fall below 2000 unit shipments," Smulders said. "Given the component overhang and lacklustre demand on the consumer and commercial side, we can expect lacklustre computer demand for at least the first half of the year." While the slowing economy will present challenges for all companies, "those companies involved in markets showing saturation, like PCs, will have the toughest time," he said.
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