It seems that not a week goes by without the stock markets having to bear the brunt of massive falls in share prices. And last week was no exception.
Two weeks ago, Intel sent Wall Street IT stocks reeling when it announced its profits were not as good as it hoped. But that situation was compounded further at the end of the week after Eckhard Pfeiffer, CEO of Compaq, told his shareholders that its Q1 sales will match last year's Q1, with profits at break-even. What's worse is that problem might continue into Q2.
In an official statement, Pfeiffer said Compaq 'fully intends to expand its business and grow its market share'. But he conceded that it had to be done carefully, following Compaq's acquisition of Digital.
Compaq claimed the problems were mostly due to commercial pressures in North America. It is true the manufacturer seems to make more price cuts in the US than Europe, but part of Compaq's problem seems to be that it needs to speed up its Optimised Distribution Model (ODM) in order to cut prices and stay competitive.
Last month, Compaq opened a call centre in Glasgow and stressed that it had plans for going direct but it would only sell its products to sophisticated users - primarily people who know exactly what they want to buy.
According to David Petts, who manages the UK call centre, direct sales will only be a small fraction of total sales, most of which will continue to be pushed through the channel.
But can the US channel differ that much from the UK channel? Pfeiffer said: 'We looked closely at our market and business plan once it became clear that sales out of our North American commercial channels were not meeting our expectations. We are putting price reductions and aggressive promotions in place in the first and second quarter to reduce these channel inventories.' In short, Compaq US has been stuffing its channel with product.
That in itself is not unusual given Compaq's indirect channel model, and happens before quarters end, to shift stock. But taken in conjunction with Intel's warning last week, there could be more to the announcements.
Pfeiffer maintained that the problem reflected a lack of sales in the first quarter. 'It is not a product issue, there is plenty of product,' he said. Intel was more coy about its profit warning, saying it was unclear what the shortfall in products was. But in the same week, Intel also formally introduced its Celeron processor - formerly Covington - which is essentially a cut-down Pentium II, aimed at recapturing market share in the entry level, sub $750 dollar market.
As Intel refuses to comment on how many Pentium IIs it has sold, or even made, it is hard to be sure whether the reason for the shortfall is to do with lack of sales in that arena. Certainly, Intel has pushed millions of advertising dollars into promoting the Pentium II, complete with BunnyPeople and co-operative marketing with its channel.
According to Mark Davison, director of processors at Datrontech, Intel is moving fast to persuade its customers to move to the different platforms.
He said: 'I would expect the Celeron from all manufacturers, but higher up the chain the first-tier vendors are designing to entry-level markets.'
He said the distributor's customers, system builders and assemblers, which constitute tiers two to three, were already picking up what he described as 'a large share of the small-to-medium enterprise (SME) business'.
However, the whole deal is about manufacturing. Davison agreed that system builders were able to build PCs at a lower cost than tier-one manufacturers.
He said they knew how to buy and build at the right prices.
Petts said the different model - ODM - was likely to be up and running by the middle of this year. It, like many other tier-one vendors, is revising its model for manufacturing, given the speed of processors from Intel released through this year.
The whole question is whether Pfeiffer's difficulties are, as Compaq claimed, local, or whether there is something else dragging down its Q1 and possibly Q2 results. If it affects Compaq, companies like Packard Bell, Dell and Gateway 2000 might also have to tighten their belts.
A source at Intel, who insisted on anonymity, told PC Dealer: 'Our company has repositioned the Celeron product. We want our tier-one customers to use the faster Pentium IIs.'
But this was denied by an Intel representative who said: 'We are still analysing the problem that caused the profit warning here.' The representative stressed that the profit warning from Compaq was unrelated.
Whether the profit warnings by Intel and Compaq are related, what is clear is that companies are having to make serious changes to their business model and that the two will not be the last to issue profit warnings.
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