Compaq's Earnings Point to Marketing Challenge

The first quarter proved a rocky one for Compaq Computer Corp. The company's first quarter net income returned 16 cents per share, a far cry from the 31 cents per share expected by Wall Street analysts. Making the situation even more difficult was the comparison to record fourth quarter results the computer giant posted in December 1998. This shortfall spurred board chairman Benjamin Rosen to take action, which cost former CEO Eckhard Pfeiffer's his job.

As the dust settles in the aftermath of April's dramatic events, other indications are pointing to an increasingly important marketing challenge Compaq now faces.

An International Data Corp. (IDC, www.idc.com) report on the PC market revealed Compaq, although still number one, has lost ground to nemesis Dell Computer Corp. Adding to the image problem that Compaq now faces, IBM Corp. announced better-than-expected earnings of $1.55 per share during the same period. Wall Street punished Compaq, driving its stock down to less than half the per-share value it had in January. Meanwhile, IBM stock soared.

Analysts believe that Compaq's main problems, while strategic in nature, have little to do with its products. For instance, Compaq's enjoyable fourth quarter was due to advance sales the company had already made for the first quarter, observes Rob Enderle, analyst with Giga Information Group (www.gigaweb.com).

Compaq made huge strides last year by buying up Tandem and Digital, but "the acquisitions haven't been as helpful as they might have thought," Enderle says. "The Digital acquisition has mostly failed in Europe and the acquisition of Tandem was never really integrated into [the same earnings] as Compaq."

Enderle contends that it is simple to understand why IBM is doing so well: IBM was able to maintain an image of stability and harness the marketing of its own products. It wasn't going through a merger so it wasn't difficult to give customers straightforward answers about what technology they should be implementing. Likewise, Dell was able to gain the ground by maintaining its focus.

Dan Kusnetsky, an analyst at IDC, says the integration of Digital's and Tandem's products into the Compaq line have simply overwhelmed the company's marketing department. "Digital and Tandem had low-volume, high-value products. Compaq is used to selling high-volume but low-value products," Kusnetsky says.

While Compaq and IBM are in the same situation with a rich layout of offerings, IBM has experience that Compaq needs. Kusnetsky says that Compaq's future depends on if it will sell these offerings. "Everyone would have to agree that Compaq has extremely good technology. They have a good foundation for future growth. It just comes down to marketing."