Compaq drops a bomb on IT sector

News Analysis: As earnings tumble at the leading PC maker, is a price war looming?

IT WAS no wonder the world's equity and currency markets began the week with a bit of a wobble. After New York closed on Friday, Compaq Computer let slip news no one wanted to hear - its first-quarter earnings would be around 15 cents a share, half of analysts' forecasts. Compaq's shares tumbled in after-hours trading. The spectre a bloody personal computer price war loomed.

Ripples from the announcement were felt around the globe, beginning in Asia where Tokyo shares lost just over 2 per cent. Likewise the dollar was weaker against the yen and the euro. There was widespread fear that Compaq's warning would trigger a pummelling of stocks in New York, both on the Dow Jones industrial average and, more particularly, on the tech- heavy Nasdaq exchange.

The announcement was, by any measure, ugly. Compaq - the largest maker of PCs in the world - blamed its revenue shortfall on both price competition and an unexpected dip in demand. This poses several difficult questions; for example, the future of the company itself and the medium-term outlook for its own share price. A year ago, the company issued a similar sales- dip warning.

More important is this: what, if anything, do the woes of Compaq augur for the information technology industry at large? Does the springtime cold at Compaq translate into a flu epidemic, not just for other PC makers but also for other sector players, including processor manufacturers such as Intel and software suppliers, including Microsoft?

And what are the implications for the broader US economy? This industry, after all, has been vital in powering the boom of recent years, buoying up both the Nasdaq and Dow and helping to reinforce high consumer confidence. Everyone wishes its continued good health.

The timing of the Compaq shock was hardly helpful. There were loud mutterings in New York yesterday that Compaq sinned by not getting word of its problems to Wall Street earlier than Friday. Instead, it spoiled the IT party at the worst possible moment - at the start of the first-quarter results season. The full Compaq picture will emerge with its 21 April report.

Punishment for Compaq was swift yesterday. At midday in New York its shares were down 23 per cent. Several leading analysts were downgrading ratings as they offered varying diagnoses for what ails it. These include difficulties in melding Compaq with Digital Equipment Corporation, which it bought last year. Many analysts predicted that embattled chief executive Eckhard Pfeiffer would have to make more staff cuts in coming weeks.

Compaq's central challenge, however, may be how to maintain share in an environment of rapidly-falling PC prices without butchering its profit margins. Some analysts suggest that Compaq may have botched its attempts, launched last year, to begin selling direct to consumers - business and private - over the telephone and Internet, while still maintaining its network of retail distributors.

Snapping at Compaq's heels are Dell and Gateway, each credited with pioneering direct selling in the industry. The proportion of PCs sold directly is expected to reach 29 per cent this year, compared to 13.5 per cent in 1995.

Morgan Stanley analyst Gillian Munson was among those voicing frustration with Compaq's warning. "The shortfall is far worse than the ranges that were thought probable," she said, adding that it indicated "that Compaq's business model is not working in this market environment. It will take some time, in our view, for the stock to come back from this disappointment and the related loss of confidence".

The consensus among the analysts vanished, however, on the wider implications of Compaq's first-quarter debacle. One school said the slowdown in demand had to herald problems for the entire industry. They pointed to the so- called "millennium factor", where business customers may have been rushing to buy equipment well in advance of 2000, which could spell a freeze in demand for the rest of this year. Another school says the problems are mostly Compaq-specific; they highlight recent commentaries from Dell and Microsoft suggesting a still-healthy outlook.

For now, the jury is still out. All eyes will be on other IT first-quarter numbers, especially from Intel, due to report after the market closes today, and Microsoft and Dell. Intel, more than Compaq, is considered a bellwether for the industry.

For what it is worth, the slaughter that some feared in New York yesterday did not materialise. The early slide on the Dow was quickly reversed, and even the Nasdaq saw only a modest midday decline.

For its part, Compaq tried to soothe investor nerves. In a conference call with analysts, Mr Pfeiffer and his chief financial officer, Earl Mason, insisted that cost-cutting plans related to the $8.4bn (pounds 5.2bn) takeover of DEC were on track and denied that Compaq was discussing any new lay-offs or restructuring ideas.

"This should not be blown out of proportion," Mr Pfeiffer said of Friday's announcements in an interview with the Wall Street Journal. "Everyone is building expectations on certain market demand growth. If it comes at a somewhat lower level, the competitive reaction leads to price cuts that are deeper and more frequent. We had both these factors in the last quarter."

PROMOTED VIDEO
News
One of the 'princesses' in the video
videoYouTube reinstates sweary video after takedown for 'violating terms'
Sport
Mario Balotelli (left) trudges off at half-time last night, to be substituted during the interval
football
Life and Style
Could you tell the difference between this and an organic alternative?
food + drink

Culinary experts in The Netherlands thought it was 'fresh' and 'tasty'

News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to US
Life and Style
tech

Of all the computers Apple has ever made there’s only one that Steve Jobs had to sell his car to finance

News
New look: Zellweger at Elle's Women in Hollywood awards on Monday

Actress sees off speculation about her face in an amazing way

News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidates on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
Arts and Entertainment
film

Marvel has released first teaser trailer week early after it leaked online

Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?