Compaq expects loss, plans restructuring

Compaq warned this week of an expected loss for its second fiscal quarter, and announced plans for a major restructuring that will leave the company with three distinct business units, each responsible for its own profit and loss.

Compaq blamed pricing pressures in the personal computer segment, inadequate revenue growth, and a non-competitive cost structure for the expected shortfall. The company expects to report a loss of 15 U.S. cents per share for the quarter ending July 28, 1999, while revenues and gross margins are expected to be flat to down sequentially, according to a statement by Compaq.

To help the PC manufacturer get back on track, the company will undergo a major reorganisation that will split the company into three global business groups -- Enterprise Solutions and Services, Personal Computer, and Consumer -- each with a separate, market-driven profit-and-loss accountability.

As a result of the changes, Compaq expects to take a "substantial restructuring charge" in the third quarter of this financial year. Once completed, the realignment plan is designed to eliminate $US2 billion in ongoing operating costs, said Benjamin Rosen, Compaq's chairman and acting chief executive officer.

"I'm convinced that with the actions we're taking ... we are at the threshold of a new Compaq -- a Compaq that is leaner, more efficient, more sensitive to customers, more Internet-centered," Rosen said, speaking in a teleconference with press and analysts.

At least one analyst approved of the PC maker's plans, adding that Compaq had become slightly "bloated and unresponsive to the market." However, Compaq isn't out of the woods yet, added Bruce Stephen, group vice president of worldwide PC research with International Data Corporation in Framingham, Massachusetts.

"They are in trouble right now; they've taken an image hit and they've been left with a few bruises," Stephen said. "In the corporate market in particular, people with a better brand image -- companies like Dell and HP -- have begun to take advantage of that."

Compaq officials said the changes will make the company leaner and more efficient, and will likely result in some layoffs, although they wouldn't say how many jobs may be lost.

The three business units to emerge from the reorganisation will be "vertically aligned from top to bottom," meaning they each will have a team dedicated to product development, marketing, field sales and other activities. Previously, those teams provided a "shared function" horizontally across market segments, said Mike Capellas, acting chief operating officer.

The company will try to make the transition transparent to customers, in part by keeping sales operations largely unchanged.

"There will be no change to account managers, no change to coverage of global accounts," Capellas said. "There will be change to how fast we can deliver solutions."

The news follows a spate of departures of high-profile executives at Compaq, starting in April with the surprise resignation of longtime CEO Eckhard Pfeiffer and Chief Financial Officer Earl Mason.

Just this week Hans Gutsch, senior vice president of human resources, organisation and environment, retired from Compaq, effective immediately. In his 11 years with the vendor, Compaq's payroll grew from 2,000 to 70,000 employees, and Gutsch was credited with playing a major role in orchestrating the company's global infrastructure.

"In the two months since the change of management at the company, we have taken a deep look into the strengths and challenges of Compaq," said Rosen in a statement. "We have determined that significant structural changes are required to enable this company to realise its enormous potential and secure its position as the preferred information technology partner for global customers."

Operating issues affecting the computer maker in the first quarter have continued to dog the company, and Compaq has "not performed to (its) potential," Rosen said.

Looking ahead, the company will step up its efforts to sell computers direct to customers over the Internet, with the goal of moving 25 per cent of its PCs through direct channels by the fourth quarter, Capellas said.

Compaq plans to update its online store in the second half of the year to provide customers with new capabilities to configure PCs over the Internet, he added.

Compaq also plans to start bundling more software and services with the PCs it sells, targeting systems at specific types of users, according to Capellas. The company also will experiment with different form factors. For example, it will sell a simple, lightweight desktop device for users who primarily send and receive e-mail, he said.

However according to Compaq Australia sources these initiatives, potentially threatening to the channel, are not in imminent danger of being implemented locally. "The US have been playing in these markets for a while now. But it is early days in Australia and we will wait and see how it works out and then assess whether it makes good business sense to adopt it in Australia," said the Compaq spokesperson.

The newly formed Enterprise Solutions and Services Group, headed by Enrico Pesatori, senior vice president and group general manager, is being formed through the integration of the company's Enterprise Computing Group and Compaq Services. The new group will be responsible for the delivery of Compaq's NonStop eBusiness solutions and the products and services that make up those solutions.

The Personal Computer Group will continue to be led by Mike Winkler, senior vice president and group general manager. The Consumer Group will continue to be headed by Mike Larson, senior vice president and group general manager.

Additional elements of the company's realignment include:

-- the creation of a global sales and marketing group with responsibility for sales processes across all business group lines;-- the establishment of a dedicated organisation to manage all of Compaq's electronic commerce activities;-- the creation of a customer advocacy organisation, combining Compaq's quality and customer satisfaction organisation with its customer advocacy initiatives.

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