Compaq cutting prices, more workers after weak Q1 results

Compaq Computer Corp. today disclosed increased workforce cutback plans and said it has started taking "aggressive pricing actions" on its low-end servers and other products in the wake of weak first-quarter financial results.

The computer maker reported a 74% drop in net income and a 3% revenue decline on a year-to-year basis for the first quarter. Those results, which included a $249 million restructuring charge, were in line with a reduced-expectations warning that Compaq issued last month.

Michael Capellas, Compaq's chairman and CEO, said during a conference call this afternoon that the company is becoming "much more aggressive with pricing reductions" in an attempt to protect its market share in core markets such as the server business. "We've really stepped this up in the past few weeks," Capellas said.

The price cuts especially apply to servers based on Intel Corp.'s microprocessors, Capellas said, noting that Compaq is feeling competitive pressure at the low end of that product line. But the company is also lowering prices on its enterprise storage products and in other areas, he added.

On the workforce side, Jeff Clarke, who took over as Compaq's chief financial officer last month, said the number of jobs that will be eliminated through a combination of layoffs and attrition has now been increased to 7,000. That's up from the 5,000 positions that Compaq had targeted in March and would cut the number of workers on its payroll by 10%.

Compaq expects to lay off about 4,500 employees as part of the cutback, Clarke said. The reductions will be made across the board, but he said they should have a "minimal impact" on the company's engineering and sales staffs. Compaq expects to lower its annual expenses by more than $500 million through the cuts, Clarke added.

In the first quarter, Compaq had a net profit of $78 million, down from $296 million in the same period a year ago. Total revenue amounted to $9.2 billion, off from the year-earlier level of $9.51 billion. Capellas said the shortfall in business was concentrated in the U.S., as revenue from overseas market grew 17% during the quarter.

"Needless to say, this remains a very challenging market," Capellas said. Most corporate users aren't canceling IT projects altogether, he added, "but they are looking for more creative ways to fund them." That, in turn, is contributing to the more aggressive pricing, Capellas said.

Compaq's second-quarter showing is expected to be similar to the results for the first quarter, Capellas indicated. But he said the workforce cutbacks and a planned reduction in product inventories should position the company to "rebound strongly" from a profit standpoint during the second half of the year "regardless of market conditions."

This story, "Compaq cutting prices, more workers after weak Q1 results" was originally published by Computerworld.

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