Compaq CEO: Recovery Won't Come Until Second Half

Says HP merger best way to grow business

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Compaq Computer Chairman and CEO Michael Capellas said he expects no major economic recovery until the second half of 2002 and reiterated that the proposed merger with Hewlett-Packard is the best way to grow the company's business.

Capellas' comments came during Compaq's fourth-quarter earnings call with analysts in which Compaq reported revenue of $8.5 billion and earnings of $92 million, or 5 cents per share, for the period ended Dec. 31. Revenue represented a 26 percent decline from the $11.5 billion recorded a year earlier. Compaq recorded a loss of 39 cents per share for fourth-quarter 2000 due to special charges.

Capellas said he expects only "moderate growth in the first half" with pent-up demand accelerating the recovery in the second half of the year. He said revenue for the first quarter should reach $7.6 billion with earnings of 1 cent per share.

'While the merger is clearly controversial, it continues to be in the best interest of shareholders, employees and customers," he said.

He said Compaq "did not back off an inch from any program we had in place" as merger plans unfolded.

Compaq Global Services continued to be the company's strongest segment, with revenue of approximately $2 billion and profit of $253 million for the quarter. During the quarter, global services had its strongest growth in customer support and financial services, but the company's systems integration business struggled, Capellas said.

He said the reason for the stronger showing in customer support and managed services was because "people want to bulletproof their infrastructure." He said the systems integration business was down because people aren't doing larger projects, adding that Compaq's systems integration business was "spread over too many practices."

As a result, Compaq is refocusing that business on five practices: wireless, Microsoft, infrastructure design, storage and telecommunications and finance.

Meanwhile, the company's access business, which includes desktop PCs, notebooks and handhelds, lost $69 million during the quarter. In the third quarter, the company lost about $255 million in that segment.

Compaq CFO Jeff Clarke said 60 percent of the North American PC revenue was direct. "We drove better efficiencies in the indirect portion of our business by significant inventory reductions, the implementation of auto replenishment capabilities with North American distributors, and terms and condition changes," he said.

Midway through the fourth quarter, Compaq informed solution providers buying products directly from the vendor that it would cut MDF rebates between 10 and 50 basis points retroactive to Oct. 1. That was followed later in the quarter by news that Compaq reduced warranty reimbursements by as much as 60 percent to authorized service providers.

Compaq's stock closed at $11.10 per share, down 30 cents for the day.

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