Compaq Sees Services Biz As Silver Lining

Compaq Computer released financials for its second quarter this week that clearly demonstrate the importance of Compaq's global services business to the future of the company.

While many of the company's other business units, most notably its enterprise and consumer-PC businesses, showed declining growth, Compaq Global Services reported 7 percent growth year-over-year. Global services' revenue for the period ended June 30 was $1.73 billion, up from $1.63 the same period last year. Global Services now makes up 23 percent of the company's total revenue, up from 21 percent in the first quarter of 2001. The company's ultimate goal is to grow services to 30 percent of the company's total revenue in the next few years.

On a whole, Compaq reported net income of $67 million, or 4 cents per diluted common share, on revenue of $8.5 billion. In the same quarter last year, Compaq reported revenue of $10.1 billion and net income of $388 million. When factoring in the company's restructuring charge of $493 million for the quarter, the result of layoffs and other cost-cutting measures, the company reported a net loss of $279 million, or 17 cents per share.

Chairman and CEO Michael Capellas says he's proud of the company's performance in light of the challenging economic conditions. "We delivered on our commitments to improve the company's business model and built momentum behind our services and solutions-led strategy," Capellas says. "A good example is Compaq Global Services, which grew 7 percent year over year or 13 percent in constant currency."

Gross margin for the quarter was 21.5 percent, down one point sequentially and two points on a year-over-year basis. Operating expenses for the quarter were $1.7 billion, down $102 million from the first quarter of 2001 and $120 million from the same period last year.

"We met consensus EPS even as inventory levels were dramatically reduced across the entire supply chain," Capellas says. "During the first half, inventory levels were reduced by nearly $1 billion, including more than $500 million of channel inventory--while we also improved on-time delivery."

The dark spot for the company is its line of access business products, which includes commercial and consumer personal computers. That business was down a full 22 percent, a result of what the company calls an "aggressive pricing" environment. Losses in Compaq's consumer-PC business grew because of the decline in demand and reduced prices in the market. The company's enterprise-computing business, which includes its Industry Standard Servers Group, Business Critical Solutions Group and Enterprise Storage Group, was also down 21 percent from 2000 figures, also blamed on weakening demand and aggressive pricing conditions in the market.

Capellas told analysts he believes the company's current actions will position it for long-term growth and profitability. "We've seen some stabilization in the United States--with the exception of the consumer-retail segment--but the market has weakened in Europe and other geographies," Capellas says. "In this environment, we are focused on improving our business model and executing our strategic plans."

He says the market will continue to remain volatile and difficult next quarter. As a result, he expects third-quarter revenue to be between $8 billion and $8.4 billion, and earnings per share to be between 7 cents and 9 cents.