The Day Ahead: Compaq wins credibility back, now must grow
Published: 26 Jul 2000 12:11 BST
It took a year, but Compaq chief exec Michael Capellas has won the company's credibility back by doing the basics. Now, he'll have to stick his neck out a bit more to get Wall Street buzzing.
In what amounted to his one-year anniversary, Capellas was pleased to announce that Compaq Computer at least met Wall Street estimates for three consecutive quarters.
For that feat, Capellas deserves a few kudos. A year ago, Compaq put up second quarter results that could be summed up in one word -- debacle. The company laid off 8,000 people and reported a loss as costs ballooned. Credibility and Compaq were two words that didn't go together.
What a difference a year makes. Compaq met estimates Tuesday night with a profit of $387m (£255.6m), or 21 cents a share, as sales were up eight percent to $10.1bn. Capellas said he expects double-digit sales growth in the second half.
"Clearly we have some work to do, but momentum is building for a strong second half," he said on an analyst conference call. "We're in a better position than ever."
Capellas has delivered on what he said he'd do with Compaq -- stabilise the company and deliver measurable results. Capellas said a year ago the company would cut $1.5bn in operating expenses, boost gross margins, return the PC business to profitability, accelerate growth and communicate with investors. He has delivered.
For that, Capellas gets a solid "B" on his report card. Capellas hasn't wowed anyone, but he's starting to win credibility points on Wall Street. "He deserves credit for putting the company on course," said SG Cowen analyst Richard Chu.
Chu's not alone. Many analysts give Capellas credit for Compaq's turnaround. But they also note that Compaq's chief has set conservative targets and merely accomplished the basic blocking and tackling. "He had to do that to build credibility," said Chu. "Now when he does get aggressive, he'll be believable."
Capellas' time to get aggressive is now.
If year one was about credibility, Capellas' second year on the job will be about regaining market share and growing the company.
Compaq is projecting double-digit revenue growth in the second half. Officials said the company is comfortable with third quarter revenue of $10.8bn and consensus estimates calling for a profit of 29 cents a share.
Compaq's chief said the company will be announcing new products and plans to be "much more aggressive" about defining itself and "refocusing on who we are". Simply put, Compaq wants to drive market share gains. It's tired of losing market share and mind share to the likes of Dell Computer and Hewlett-Packard, which has been defining itself for the last year.
The company clearly has some work to do. Compaq's enterprise unit was led by sales of its ProLiant servers, which basically fueled a nine percent revenue gain. Aside from ProLiant sales, results were spotty. Sales of Compaq's GS line of Alpha servers fell 13 percent in the quarter and revenue from the company's storage products were flat. Services revenue fell four percent from a year ago.
On the commercial PC side of the business, Compaq said the unit was profitable courtesy of its iPAQ line of Net appliances. Even so, sales were up a meager three percent. Things were rosy for the consumer PC business, which grew 32 percent in the quarter and now enters a strong back-to-school sales season.
Analysts said Compaq's business divisions present a mixed picture. If Compaq can get all of them firing, it'll be able to grow market share. The real trick is to grow share without diminishing profits. Dell grew market share and kept its earnings, but Compaq failed miserably when it sacrificed profits for market share.
Capellas said Compaq won't make the same mistakes twice, but the company's turnaround so far has benefited from a benign pricing environment. If a price war erupts, Compaq will have to choose between market share and profits. Those concerns may be why management isn't telling analysts to boost their expectations yet.
"We have to profitably drive for growth," said Capellas. "We can get both share and profits."
If Capellas meets that goal, he may just bring home an "A" next year.
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