Compaq reports first quarter earnings

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Compaq Computer Corporation has announced first quarter 2000 net income of $325 million, or $0.19 per diluted common share, compared with $281 million, or $0.16 per diluted common share, in the year-earlier period. Adjusted for a net after-tax gain of $44 million related to Compaq's strategic investment portfolio, earnings per diluted common share were $0.16.

Compaq reported worldwide revenue of $9.51 billion for the quarter ended March 31, 2000, an increase of 1 per cent year over year. In constant currency, revenue increased 4 per cent year over year.

First quarter gross margin as a percentage of revenue declined 1.7 percentage points year over year, and increased 0.8 percentage points sequentially.

Operating expense totaled $1.76 billion for the first quarter, a 7 per cent reduction from the first quarter 1999, and an 8 per cent reduction sequentially. This was the third consecutive quarter that Compaq's operating expense decreased.

“Overall, I am pleased with our improved execution in the quarter as the fourth to first quarter transition has traditionally been challenging for us,” said Michael Capellas, Compaq president. “While our revenue was affected by the early quarter industry slowdown caused by the Y2K lockdown, a general weakness in Europe, and continued efforts to reduce our channel inventory, we met our earnings objectives. We also demonstrated continued progress in reducing our cost structure and returning to topline growth.

“We made major strides in improving the business model of our commercial PC group. The consumer business enjoyed strong revenue growth. Himalaya revenue was up and we saw good results in our industry standard server segment except in Europe. And we are taking aggressive steps to re-ignite growth in Europe,” said Capellas.

In the Enterprise Solutions and Services Group (ESSG), revenue was $4.7 billion, down 4 per cent year over year. Segment operating income was $568 million, a decrease of 13 per cent year over year. First quarter ESSG operating income was 12 per cent of revenue. The enterprise business represented 50 per cent of first quarter revenue. This business declined due to Y2K lockdowns, channel inventory reductions, and a weak European market.

Industry standard server demand remained strong in all regions except Europe, with high-end 8-way servers shipping at a record pace. Himalaya sales also increased. Alpha sales decreased due to a manufacturing plant transition in North America and customer anticipation of the May 2000 launch of Compaq's next generation Alpha server, ‘Wildfire’. The company said it already has orders for 120 Wildfire servers, signalling a strong start for Q2.

The storage business had mixed results with lower attached storage due to channel inventory reductions, but saw increased external storage sales.

Total services revenue grew 2 per cent with the Y2K lockdown having a marked effect on professional service engagements.

The Commercial Personal Computing Group posted revenue of $2.9 billion, a decrease of 7 per cent year over year. The Commercial PC Group reported an operating loss of $19 million, down from a profit of $24 million in the same period one year earlier. On a sequential basis, losses were reduced by 75 percent. Significant progress has been made over the past three quarters, with an improvement in segment operating income results of over $200 million from Q2 1999 levels. Commercial PC products accounted for 30 percent of first quarter revenue. The steady improvement reflects more selective higher-margin sales and the completion of the acquisition of key assets from Inacom.

Compaq's Consumer Group posted revenue of $1.8 billion, an increase of 35 per cent over the prior year period. Segment operating income was $82 million, essentially flat year over year. The Consumer Group represented 19 percent of first quarter revenue, and achieved strong market penetration with a 50 per cent year-over-year increase in unit sales and exceptional international expansion. ‘Beyond the box’ revenue, including printers and Internet access and traffic, represented more than 15 per cent of operating income.

The business groups’ results do not include corporate and unallocated shared expenses of $171 million in the first quarter of 2000 and $270 million in the first quarter of 1999.

On a geographic basis year over year, Compaq's revenue grew 4 per cent in North America; 39 per cent in Latin America, 14 per cent in Asia-Pacific, 21 per cent in Japan and 9 per cent in Greater China, while declining 12 percent in Europe, Middle East, and Africa.

“During the last three quarters, we’ve focused on building a strong base for profitable growth,” said Capellas. “We’ve made excellent progress on restoring the fundamentals of the business. We’re successfully executing our strategy to lead in providing Internet infrastructure and access. And we will drive topline growth through new products, strategic partnerships, and aggressive go-to-market plans.

“Our innovative products will range from Wildfire at the high end to our iPAQ Pocket PC. Compaq is the premier Windows 2000 partner and we believe this is one of the foundation platforms for the Internet economy. We’ve announced new or expanded alliances with market leaders like Siebel Systems, Radio Shack, Sears, StorageNetworks, and Disney. And recently, Compaq committed more than $1 billion to the service provider market where we continue to extend our preferred supplier position.

“We do not underestimate the challenges that remain, but our progress is evident both from our financial results and from the momentum we're gaining in the market. We believe that this trend will continue in the second quarter and accelerate during the second half of the year,” said Capellas.

Compaq Computer Corporation, a Fortune Global 100 company, is the largest supplier of computing systems in the world. Compaq designs, develops, manufactures, and markets hardware, software, solutions, and services, including enterprise computing solutions, fault-tolerant business-critical solutions, and communications products, commercial desktop and portable products, and consumer PCs.

Compaq products and services are sold in more than 200 countries directly to businesses, through a network of authorized Compaq marketing partners, and directly to businesses and consumers through Compaq’s e-commerce Web site

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